IFB Expanssion Chalanges

ST.
MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
CHALLENGES OF INTEREST FREE BANKING EXPANSION: THE

CASE OF COMMERCIAL BANKS OF ETHIOPIA, WEST ADDIS
DISTRICT
BY
NEIMA ABDU
MAY, 2019
ADDIS ABABA, ETHIOPIA
i
DISTRICT
BY: NEIMA ABDU
ADVISOR: DR. GASHAW TIBEB
A THESIS SUBMITTED TO ST. MARY UNIVERSITY SCHOOL OF

GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTERS OF BUSINESS
ADMINISTRATION
MAY, 2019
ADDIS ABABA, ETHIOPIA
ii
ST MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES FACULTY OF BUSINESS

DISTRICT
BY
NEIMA ABDU
APPROVED BY BOARD OF EXAMINERS
_______________________ ________________________
Dean, Graduate Studies Signature
________________________ _________________________
Advisor Signature
_______________________ __________________________
External Examiner Signature
________________________ ___________________________
Internal Examiner Signature
iii
Declaration
I, the undersigned, declare that this thesis is my original work, prepared under the guidance of
Dr Gashaw Tibeb. All sources of material used for the thesis have been duly acknowledged, I
further confirm that the thesis has not been submitted either in part or in full to any other higher
learning institution for the purpose of earning any degree
Neima Abdu ___________________ _______________
Candidate‟s Name Signature Date
St. Mary‟s University Addis Ababa May, 2019
iv
ENDORSEMENT
This thesis has been submitted to St. Mary‟s University, School of Graduate Studies for
examination for approval as a university advisor.
___________________ ___________________
Dr Gashaw Tibeb, Signature
Name May, 2019
St. Mary‟s University Addis Ababa
v
Acknowledgments
First and foremost, I am very grateful to Allah, the Almighty, for giving me the strength and
energy to undergo all the challenges in life. Also, I am grateful to Allah who enables me to
complete this work.
Secondly, in the course of this research, I am extremely grateful to my advisor, Dr. GashawTibeb
for his professional advice, guidance, suggestions, encouragement, patience and invaluable
assistance during the entire process as well for being very kind, warm-hearted and polite to me
throughout my work.
Next, I would like to express my gratitude to my mother, my fathers, my brothers, sisters, friends
for their support and encouragement during my journey towards the completion of this study,
and without whose constant encouragement, understanding and support the work would not have
been completed.
Finally, I am also grateful to the staff members of commercial Banks of Ethiopia who cooperate
me in the data collection process.
vi
Acronyms and Abbreviations
CBE: Commercial Banks of Ethiopia
CSA: Central Statistical Authority
IFB: Interest Free Banking
IFBW:Interest Free Banking Window
NBE: National Bank of Ethiopia
PLS: Profit and Loss Sharing
PWC: Population World commission
SD: Standard Deviation
SPSS: Statistical Package for Social Science
vii
Table of Contents
Declaration................................................................................................................................................... iv
ENDORSEMENT......................................................................................................................................... v
Acknowledgments ....................................................................................................................................... vi
Acronyms and Abbreviations ......................................................................................................................vii
List of Figures ...............................................................................................................................................xi
Abstracts ..................................................................................................................................................... xiii
UNIT ONE.................................................................................................................................................... 1
INTRODUCTION ........................................................................................................................................ 1
1.1 Background of the Study .............................................................................................................. 1
1.2 Statement of the problem .............................................................................................................. 3
1.3 Research Questions ....................................................................................................................... 6
1.4 Objectives of the Study ................................................................................................................. 6
1.4.1 General Objective ................................................................................................................. 6
1.4.2 Specific objectives ................................................................................................................ 6
1.5 Significance of the study............................................................................................................... 6
1.6 Scope of the Study ........................................................................................................................ 7
1.7 Organization of the Paper ............................................................................................................. 7
UNIT TWO................................................................................................................................................... 9
LITERATURE REVIEW ............................................................................................................................. 9
2.1 Introduction................................................................................................................................... 9
2.2 Over View of Interest Free Banking ............................................................................................. 9
2.3 Evolution of Interest Free Banking or Islamic Banking ............................................................. 10
2.4 Theories of Interest Free Banking or Islamic Finance ................................................................ 11
2.4.1 Profit and Loss Sharing (PLS) Theory................................................................................ 12
2.4.2 Murabaha (Cost-Plus Sales Contract) ................................................................................. 14
2.4.3 Musharekah (Equity Partnership) ....................................................................................... 14
2.4.4 Ijarah (Lease Financing) ..................................................................................................... 15
2.4.5 Bai Salam (Advance Payment) ........................................................................................... 15
2.4.6 Bai Istisna (Procurement Engagement) .............................................................................. 16
2.5 Empirical Studies of the challenges of IFB ................................................................................ 16
viii
2.5.1 Lack of adequate knowledge and unfavorable attitude towards IFB services and products
16
2.5.2 Shortage of Sheria Experts and Trained Man Power .......................................................... 18
2.5.3 Lack of Market based Intermediation and Products ........................................................... 19
2.5.4 Legal system (regulatory plate form and government supports) ........................................ 19
2.6 Research Gap .............................................................................................................................. 20
2.7 Conceptual Framework of the study ........................................................................................... 20
2.8 Summary ..................................................................................................................................... 22
Market based Intermediation and Products......................................................................................... 22
UNIT THREE ............................................................................................................................................. 23
RESEARCH METHODOLOGY ............................................................................................................... 23
3.1 Introduction................................................................................................................................. 23
3.2 Research Design ......................................................................................................................... 23
3.3 Population and Sampling Procedures ......................................................................................... 24
3.3.1 Population ........................................................................................................................... 24
3.3.2 Sampling Design ................................................................................................................. 25
3.4 Methods of Data Collections ...................................................................................................... 27
3.4.1 Type and Source of Data..................................................................................................... 27
3.4.2 Data Collection Techniques ................................................................................................ 27
3.5 Validity and Reliability of Instruments....................................................................................... 28
3.6 Methods of Data Analysis........................................................................................................... 29
3.7 Summary ..................................................................................................................................... 29
UNIT FOUR ............................................................................................................................................... 30
DATA ANALYSES AND DISUSSIONS ............................................................................................. 30
4.1 Introduction................................................................................................................................. 30
4.2 Demographic Characteristics of Respondents ............................................................................ 30
4.3 Socio-Economic Characteristics of Respondents ....................................................................... 31
4.4 Challenges of IFB expansion ...................................................................................................... 33
4.4.1 Lack of Adequate Knowledge and unfavorable Attitude towards IFB Services and
Products 33
4.4.3 Lack of Market Based Intermediation and Products ........................................................... 44
ix
4.4.4 Legal System (Regulatory Plate Form and Government Supports) .................................... 50
4.5 Summary ..................................................................................................................................... 55
UNIT FIVE ................................................................................................................................................. 57
CONCLUSIONS AND RECOMMENDATIONS ................................................................................. 57
5.1 Conclusions................................................................................................................................. 57
5.1.1 Lack of Adequate Knowledge and unfavorable Attitude towards IFB Services and
Products 57
5.1.3 Lack of Market Based Intermediation and Products ........................................................... 58
5.1.4 Legal System (Regulatory Plate Form and Government Supports) .................................... 59
5.2 Recommendations ....................................................................................................................... 59
5.3 Research Limitations and Future Research Directions ............................................................... 60
References................................................................................................................................................... 62
Appendices I …………………………………………………………………………………………………………………………………………66
Appendices II……………………………………………………………………………………………………………………………………….68
x
List of Figures
Figure2.1: Conceptual Framework of the Study……………………………………………….22
Figure4.1: Adequate knowledge and favorable Attitude towards IFB Product and Services….34
Figure4.2: Shariah Scholar and Trained Man Power…………………………………………..40
Figure4.3: Market Based Intermediation and Product………………………………………….45
Figure4.4: Legal System (Regulatory Platform and Government support)…………………….51
xi
List of Tables
Table3.1: Number and Name of Sample Banks with Their Allocated Questionnaires………25
Table3.2: Number of IFB Customers by District in Addis Ababa…………………………...26
Table4.1: Percentage Distributions of Respondents by Demographic Characteristics……….31
Table 4.2: Socio-Economic Status of Respondents…………………………………………..32
Table 4.3: Mean and Percentage Distributions of Knowledge and Attitude

Related Questions……………………………………………………………………………39
Table 4.4: Mean and Percentage Distributions of Sheriah Experts and Trained Man
Power………………………………………………………………………………………..44
Table 4.3 Mean and Percentage Distributions of Market based Intermediation
and Products Related Questions……………………………………………………………50
Table 4.4: Mean and Percentage Distributions of Legal System Related Questions……...55
xii
Abstracts
Currently, the use of interest free banking shows increment as the total number of
demanders’ increases from time to time. Thus, the main purpose of this study was to
investigate the challenges of interest free banking expansion in commercial banks of
Ethiopia, west Addis district. To attain the main intents of the study, the required
information were drawn both from primary and secondary sources. Purposive
sampling method was used to select 16 banks among 116 banks operating interest
free services in the west Addis district and 90 bank’s employees who are directly
related to the topic. Five point likert scale structure questionnaire was main means
to acquire the primary data. Secondary data were also used to supplement the
primary data. In analyzing and interpreting the primary data, quantitative research
techniques had been employed. SPSS version 24 and Microsoft Excel Spread Sheet
soft wares were used to analyze the quantitative data. Statistical tools like
percentages and means were employed and the findings were displayed in tables and
figures accordingly. The study revealed that lack of sufficient knowledge and
unfavorable towards interest free banking services and products, absence of Sheriah
scholars as well as trained employees, absence of market based intermediation and
product, and lack of regulatory platform and government support were main
impediments affecting the expansion of interest free banking services and products in
commercial banks of Ethiopia.However, the majority of the respondents confirmed
that Interest free banking has adequate demand or customers, incomplete traditional
IFB instruments and smaller economic of scale compared to the conventional
banking system.Accordingly, the study recommends that there should be vigorous
public enlightenment programmes to create more awareness, and to remove
misconception and doubt among the customers and potential customers.
Shareholders, bank’s board directors and the management of the bank should accept
the concept and be cooperative with interest free banking window of the banking and
establish a working Shariah supervisory board for interest free banking operation
and strictly comply with its guidance. The government of Ethiopia should take more
proactive efforts to promote Interest free banking services in accordance with
customers’ satisfaction.The NBE and the Ethiopian government had better to be in a
position to laid dawn sound regulatory plate form and support toward the expansion
of IFB services and product in accordance with Sheriah Law.
Key words: Interest free banking, Shariah, likert scale, SPSS
xiii
UNIT ONE
INTRODUCTION
1.1 Background of the Study
Banks have always played an important position in the country‟s economy. They
play a decisive role in the development of the industry and trade. They are acting
not only as the custodian of the wealth of the country but also as resources of
the country, which are necessary for the economic development of a nation
(Kalpana & Rao, 2017). It is one of the essential mediums for mobilizing development
funds and sustainable economic activities (Jemal, 2018). Banks pay interest to the
depositors for savings and term deposits, and charge interest to the borrowers for
loans advanced. Interest is the amount charged to a recipient or paid to an investor, and
may be a proportion of the principal amount advanced or deposited. The bank is in a
position to cover its expenses and earn a profit by charging the recipient of facilities such
as loans a higher interest than is paid to the depositor (Nwite, 2005)
Banking is a financial service that primarily consists of receiving money owned

by individuals and entities, and then lending out this money at a price (interest) in order
to make profit. Banking services also include checks, credit and debit cards, ATM
services, safe custody of valuables, Trade Finance and For ex-services, funds
transfer, internet and mobile banking services. The primary role of banks however,
is financial intermediation which refers to channeling of funds from depositors to
borrowers (Allen &Carlleti, 2008). Financial intermediation provides savers with an
outlet for their funds whereas at the same time providing funds to borrowers for
their expenditure. The most recent and notable development in the banking industry is the
emergence of Islamic Banking System and Interest-Free Banks in both developing and
developed countries of the world (Ibrahim et al., 2011)
Literatures on Islamic banking indicated that Interest free banking or Islamic finance has
grown rapidly over the past decade, and its banking segment has become too vital for
various countries in a wide range of regions (Tsion , 2017). For instance, according to
1
IMF (2015), Islamic finance is projected to continue to expand in response to economic
growth in countries with large and relatively unbanked Muslim populations. It is also
fueled by the large savings accumulated by many oil-exporting countries that are seeking
to invest in Shari’ah-compliant financial products. Aziz (2009) also asserts that the
Islamic financial industry has gained great acceptance and appreciation that has led to
expansion beyond the traditional borders of the Muslim-based economies into the
major industrial economies. Islamic banking is non-interest bearing and needs contractual
agreement between the bank and the depositors; which identify the profit and loss sharing
principles. Profit and loss sharing is an agreement between the transacting parties to
invest their pool resource in a project to share profit and loss. On other hand, the
conventional banking provides fixed rate of interest in return on the investment deposited
by the depositors.
Moreover, The Islamic financial institutions are increasing at a much faster pace in
comparison to the conventional banking system, especially in the Islamic countries
in the last 30 years due to the increase in demand for Shariah compliant products.
Currently, there are about 200 Islamic banks providing Shariah compliant banking in
more than 70 nations. These include not only in Islamic countries but also in
western countries (Ramazan et al., 2012). According to Teferi (2015), introduction of
IFB does not only create inclusive financial system for the Muslim population but also
has a potential to influence and enhance the economic development of the country
through resource mobilization and employment creation by encouraging people to use the
banking system. Various research studies confirmed that Islamic banking principles
promote economic growth in many countries of the world. For example,
(Tabashi&Dhankar, 2014) in their study showed that Islamic finance principles and
instruments are vital for economic growth and welfare of the society, if it is applied for
the financial system of any country, it will lead to creation of job opportunities and
optimal wealth distribution in the society. The positive growth rate and progress of
Islamic finance industry year after year combined with its stability during financial crisis
attracts the attention of many policy makers in different countries and particularly in
where multi-race and religion back ground, and the possibility of adapting it as an
alternative financial system besides the conventional one.
2
Islamic finance products are available for all people irrespective of their religions, race
and beliefs. For instance, the Vaticans claim that banks should look at the rules of Islamic
finance to restore confidence amongst their clients at a time of global economic crisis
(Mutua, 2017). In Malaysia, for example, 52% of Islamic banks‟ customers are non-
Muslims, which mean everybody in the world can have access to Islamic banking
products particularly in countries where there are many people with different
backgrounds, thoughts and religious beliefs (Musab, 2017).
Research findings indicated that Islamic banking offers viable and efficient modes of
finance (Nedel, 2017) and used as a catalyst for development. The principle goals and
functions of the Islamic banking system include economic well-being with full
employment and maximum rate of economic growth, equal distributions of income
and wealth and as a result socio-economic justice, and the generation of sufficient
savings and their productive mobilization and stability in the value of money (Chapera,
2000). Financing the Islamic banks have contributed to the increament of investment and
attracting Foreign Direct Investment inflow (FDI) in the long term and in a positive
way in UAE (Tabashi &Dhankar, 2014).
The empirical studies that have been conducted so far have mainly examined the
efficiency, superiority and stability of Islamic banks compared to conventional
banks to achieve some intermediate monetary target for the ultimate target which is
concentrated towards the achievement of sustaining real economic growth, reducing
inflation and lowering unemployment. For example, Darrat (1988) found that interest-
free banking system is more superior to achieve the monetary target. This indicated that
expanding interest free banking that support the growing need of the population is
indespansable not only economic growth but also to tolerate any troble resulted from
economic ill.
1.2 Statement of the problem

Over a century, the banking industry in Ethiopia has been operating; however, interest-
free banking had never been practiced even though more than one third of Ethiopians are
3
identify as Muslim (Jemal, 2018). Until 2011, there were no banking products were
available to serve the Muslim community and non-Muslim population who do not want
interest. Even if 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 implement and capitalize on a prosperous IFB sector in Ethiopia. There has
been no concrete work conducted for a proper roll out of Shariah based products and
services. Currently, the directive is very broad and does not provide any specificity in
terms of product lines, rules and regulations to ensure fully, the products developed by
financial institutions are truly, in line with Sharia law.
Ethiopia is a country where Muslims account for nearly 34 % of the population (CSA,
2008) began IFB system too recently. Many people in the country shy away from
banking services due to the interest attached on money savings. However, in Ethiopia,
now nine banks have the license from NBE and start promoting IFB service and
accepting non interest deposits but five of the conventional banks are involved in Islamic
financing system. But, the service given by such banks are, by far and large, is believed
to be inadequate with the growing Muslim population in the country. Therefore, the
question is what are the major constraints that affect the growth of Interest free banking
products and services to fully and adequately address the demand of such overwhelming
population? Correspondingly, various literatures indicated that constraints related to
shortage of adequate knowledge and unfavorable attitude towards IFB expansion, lack of
sheriah scholars and trained man power, lack of market based intermediation and
products and lack of legal system are supposed to be affect the expansion of IFB services
and products.
Additionally, by considering the overall importance of IFB in Ethiopia, few studies were
conducted on the attributes of IFB. Among these studies Mohammed (2012) conducted a
research on the prospects, opportunities and challenges of Islamic banking in Ethiopia.
His findings identified lack of awareness, regulatory and supervisory challenges,
institutional challenges, lack of support and link institutions, 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 are the potential challenges of
4
IFB. Debebe (2015) also conducted a study on the factors affecting customers to use
interest free banking in Ethiopia and found 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.
Kerima (2016) conducted a study on the challenges of IFB services in the case of
commercial bank of Ethiopia and found 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.
Tsion (2017) conducted a research on the challenges and opportunities of IFB in

Ethiopia. Her study found that lack of awareness by customers about IFB services,
institutional need for special regulations and lack of specialized human resource and
segregation of funds for effective implementation of IFB were main challenges of IFB.
Moreover, A study by Jemal (2018) on practices and challenges of interest free banking
windows of commercial banks in Ethiopia confirmed that lack of supervision by NBE,
lack of confidence and trust of clients, lack of legal support from government, lack of
qualified human resource, lack of cooperation among Islamic windows, lack of
infrastructure suitable for Interest free banking operation, and doubt of clients identified
by the practitioners as major challenges in the process of offering interest free banking
services in Ethiopia.
However, none of the above studies have addressed the challenges that affect the growth
or expansion of IFB products and services in Ethiopia. Therefore, this study hopes to fill
this research gap by investigating the potential constraints that hinder the expansion of
IFB services and products by taking CBE west Addis district as a case study.
5
1.3 Research Questions
The study guided by the following basic research questions.
1) What are the major factors related to knowledge and unfavorable attitude
towards IFB services and products that challenges IFB expansion in
Ethiopia?
2) What are the bottlenecks related to Sheria experts and trained man powers
that hinder the expansion of IFB in Ethiopia?
3) What are the major constraints related to market based intermediation and
products that challenges IFB expansion?
4) What are the major factors related to legal system (regulatory plate form and
government supports) are the challenge for IFB expansion?
1.4 Objectives of the Study
1.4.1 General Objective

The general objective of the study was to investigate the challenges on the expansion of
interest free banking in some selected commercial bank of Ethiopian, West Addis District
1.4.2 Specific objectives

The research has the following specific objectives
 To assess whether inadequate knowledge and negative attitude towards IFB

services are challenge to IFB expansion or not.
 To assure shortage of Sheria experts and lack trained man power are the
challenges for the expansion of IFB or not.
 To investigate whether the lack of market based intermediation and products
become challenges to IFB expansion or not.
 To assess whether the legal system (regulatory plate form and government
supports) become challenges for IFB expansion or not.
1.5 Significance of the study

This study has its own theoretical, methodological and practical contributions.
Theoretically, the study contribute to the existing pool of knowledge on the challenges of
interest free banking expansion particularly in the Ethiopian context; serve as a basis for
6
further research in the field of interest free banking. It also provides an understanding and
explanation of the challenges facing interest free banking with in Commercial banks.
Methodologically, this study clearly shows the way how to assess the major constraints
that affect the expansion of IFB. This is the sole contribution of the study. Practically,
Commercial banks of Ethiopia and other commercial banks may use the findings from
this study to enhance their knowledge on practices and challenges of interest free
banking. This study also can assist the bankers in formulating different strategies and
policies to tackle challenges related with the expansion of interest free banking services
and products. This study could also help both those banks currently have interest free
windows and intended to launch such product and service in the future.
1.6 Scope of the Study
This study could be comprehensive and all-inclusive in getting information and giving
deep view of investigating the major impeding factors of interest free banking expansion
in Ethiopia if it addresses all banks in the country. However, in order to make the study
more manageable in terms of the researcher‟s aim and interest, available time, finance
and facilities, attempt was made to delimit the scope of the study on some selected west
district of CBE in Addis Ababa.
There are about 124 conventional commercial banks under west district operating in
Addis Ababa, Ethiopia. Of these, 116 of them have licensed to offer Interest free banking
products and services, and began to operate. Thus, on the basis of scientific justification
stated in unit three of this study, the scope of the study comprised of 16 conventional
banks fully operating Interest free banking or Sharia compliant banking under the west
district of Addis Ababa branches. So that, the study is centered on the them rather than
other banks
1.7 Organization of the Paper

The rest of the dissertation is organized into five chapters. It begins with the introduction
chapter in which background of the study, the statement of the problem, objectives of the
study, the research questions, significance of the study, limitation and delimitation of the
7
study, and organizations of the study are included. The next chapter attempts to review
the conceptual, theoretical and empirical related literatures. The third chapter is the
methodology, which includes the research design, data collection methods, sources of
data, research tools, sampling procedure and determination, validity and reliability of
instruments, methods of data analysis and ethical considerations. The fourth chapter
elaborates the discussion of the main findings of the study. Finally, the last chapter
provides conclusions and recommendations of the study.
8
UNIT TWO
LITERATURE REVIEW
2.1 Introduction
This chapter gives an insight into various studies conducted by pioneer researchers on
the challenges of IFB expansion in Ethiopia. It selectively reviews the concepts,
theoretical literatures and empirical evidences related to the ways how various factors
affects the expansion of IFB services and products. The main goal of the review is to
assess why and how the existing impediments influence the IFB services and products
given by the CBE in the context of varied and changing environmental, policy and
institutional factors. Theoretical literature of the study, including Islamic banking is
discussed briefly in this chapter. Then, based on the theoretical literature and basic research
questions of the study, appropriate theoretical and conceptual frameworks have been
selected and designed, respectively, at the view of seeing the world and conducting the
research on the line of the road map. To these effects, the author starts with the discussion
on the over view and evolution of IFB, followed by a brief explanation of the various
theories related to the topic under discussion. Then, the empirical literatures related to the
challenges of IFB or Islamic banking was discussed as well in this section of the study.
Finally, The insights gained from this chapter will inform us necessary information
pertaining to the main theme of the investigation that enable us to compare with the other
findings and give clue about how to analyze the data in the subsequent chapters.
2.2 Over View of Interest Free Banking

According to the study made by Ibrahim (2012), the concept of Islamic Banking and
Interest Free Banking is synonymously used in Islamic Economics literature as an
alternative to the interest-based conventional banking practice. However, there is a
difference between an interest-free bank and an Islamic bank but they are sometimes used
interchangeably. Islamic banking not only avoids interest in all its ramifications but also
it avoids all other Islamically prohibited activities. Interest-free banking system on the
other hand, does not engage in interest but there is no reason to suppose that all its other
activities will be done strictly according to Islamic law or “Shariah”.
9
Therefore, Islamic banking or interest free banking is a financial system whose key aim is
to fulfill the principle of the Holy Quran and the teaching of Prophet Mohammed.
Islamic law reflects the commands of God and this regulates all the various aspects
of a Muslim‟s life and hence Islamic finance is directly involved with spiritual values and
social justice (Nedal, 2017). In a similar vein, it has been described as a financial
institution whose status, rules and procedures expressly states its commitment to the
principles of Islamic Sharī’ah Jurisprudence and forbids of the receipt and payment of
interest on any of its transaction (Mohamed, 2013). The basic principle that has guided all
theoretical work on Islamic banking is that although interest is forbidden in Islam, trade
and profit is encouraged. This is the nature of the Islamic banking business; however,
conventional banking uses the interest rate as a central mechanism to carry out its
financial operations.
The Islamic banking model primarily relies on the instruments of Mudarabah (joint
venture) and Musharakah (equity participation) to eliminate interest from the financial
sector and economy. Other interest-free instruments such as Murabaha (deferred
payment sale), Ijarah (leasing), Bai Salam (advance payment) and bai Istisna
(procurement engagement) are also used to enhance the practical scope, diversification
and risk management capabilities of the Islamic banking system.
2.3 Evolution of Interest Free Banking or Islamic Banking

Interest which is the backbone of the conventional banking system is not allowed in the
four major religions of the world like Judaism, Christianity, Hinduism and Islam. Thus,
their followers need the financial system which prohibited interest. This leads to the
evolution of Islamic banking or participatory interest free Islamic banking (Mohammed,
2013). Even the non-Muslim scholars, economists and bankers acknowledge that Islamic
banking has made a place for itself in the world of finance. The Vatican has put forward
the idea that "the principles of Islamic finance may represent a possible cure for ailing
markets". More over, they claimed that "Islamic finance may help western banks in
crisis"(Lorenzo, 2009). The Sharia'h explains in detail the Islamic concepts of money and
capital, the relationship between risk and profit and the social responsibilities of financial
institutions and individuals. Based on this philosophy, Sharia'h compliant financial
10
instruments and techniques have been developed and successfully used by Islamic banks
and their customers worldwide.
Islamic banking has established itself as an emerging alternative to conventional
banking and has grown rapidly over the last two decades both in Muslim and non-Muslim
countries. Islamic banks have recorded high growth rates in both size and number,
and operate in over 60 countries worldwide and bankers predict that Islamic banking
could have control over 50% of savings in the Islamic countries within the next decade
(Ahmed, 2004). Although Islamic banking was practiced during the classical period, the
modern experiment of profit and risk-sharing business, which is the cornerstone of
Islamic banking business, was first undertaken in 1963 in Mit Ghamr, a city in Egypt.
The main objective of the bank was to make fertile ground on the possibilities of
mobilizing local savings and credits as an essential requirement for socioeconomic
development in the area (El Naggar, 2005). The ripple effects of this successful
experiment were felt in some other Muslim countries after some years. Few years before
the bank consolidated its services in 1981, other banks such as the Islamic Development
Bank (IDB) and Dubai Islamic Bank opened their doors to customers in 1975. Also,
Malaysia followed suit with the enactment of the Islamic Banking in1983. This brought
about the establishment of the first formal financial institution in Malaysia in 1983
known as the Bank Islam of Malaysia (Oseni, 2009). The Islamic banking and finance
industry has continued to grow in leaps and bounds over the years. The industry grows at
a rate of 10–15% per year (Khan et al., 2007). It is now the fastest-growing segment of
the global financial system, with the unremitting establishment of Islamic banks in the
Muslim world and beyond. However, in the era of globalization, both developed and
developing countries operate interest free banking along with the conventional banking
system.
2.4 Theories of Interest Free Banking or Islamic Finance

The theory of Islamic banking is based essentially on the premise that interest, which is
strictly forbidden in Islam, is neither a necessary nor a desirable basis for banking
operations, and that Islamic teachings provide a better foundation for organizing the
working of banks. Moreover, literatures related to IFB were underpinned by certain
theories in which their mile stone have to be established on Islamic banking principles.
11
For instance, before 1946, the contributions of literatures on the development of Islamic
banking were only discussed as part of the subject in Islamic economic system. For
example, the book written by Qureshi entitled on “Islam and the Theory of Interest”
looked upon banking as a social service that should be sponsored by the government like
other public institutions such as public health and education (Qureshi, 1946). His view
was based on the point that the bank could neither pay any interest to account holders nor
charge any interest on loans advanced. He also suggests the possibility for both Islamic
banks and entrepreneur to create a partnership. He did not mention any thing about the
profit-sharing principle.
Later on, in 1952, Ahmed in his book entitled on Economics of Islam proposes the
establishment of Islamic banks on the basis of a joint stock company with limited
liability. In his proposition, in addition to current accounts, on which no dividend or
interest should be paid, there was an account in which people could deposit their capital
on the basis of partnership, with shareholders receiving higher dividends than the account
holders from the profits made (Ahmed S. , 1952). Like Qureshi (1946), Ahmad (1952)
also suggests of possible partnership arrangements with the entrepreneur who seek capital
from the Islamic banks. However, at that time, the partnership principle left undefined,
nor was it clear who would bear the loss if any. It was also suggested that Islamic banks
should cash bills of trade without charging interest, using the current account funds. From
here, Islamic banks only charge fee to entrepreneur. Later, the principle of Mudarebah,
Mushareka, Murabaha, Bai Salam (advance payment) and Bai istisna have been
introduced as a theoretical underpinning of Islamic banking system. Brief accounts of
them are discussed under here.
2.4.1 Profit and Loss Sharing (PLS) Theory
Islamic scholars treat PLS instruments like Mudarabah and Musharakah as a central
pillar of the Islamic banking model. In Mudarabah banking, the Islamic bank accepts
funds from depositors under risk-sharing arrangements. The Islamic bank either directly
invests these funds in profitable investments or extends them to entrepreneurs on a risk-
sharing basis. The Islamic bank shares the profit or loss made on Mudarabah ventures
with its depositors. The principle of Mudarabah was appealed systematically by Uzair in
12
l955. His main contribution lay in suggesting Mudarabah as the main premise for
'interest less banking'.
However, his argument that the Islamic bank should not make any capital investment
with its own deposits rendered his analysis somewhat impractical (Uzair, 1955).
Mohammed (1966) also suggested a banking system with Mudarabah as the central
instrument for interest free banking system. He conceptualized that the Islamic bank
would act as a Mudarib in so far as the depositors were concerned, while the 'borrowers'
would act as Mudaribs in so far as the Islamic bank was concerned. In his suggestion, the
Islamic bank could provide not only the capital procured through deposits but also the
capital of its own shareholders. He also took note that his view with regard to the
distribution of profits and the responsibility for losses was strictly in accordance with the
Shariah. Mudârabah is sometimes referred to as a sleeping partnership because the
mudarib runs the business and the financier cannot interfere in management, though
conditions may be specified to ensure better management of capital. Islamic banks
mainly make use of mudârabah financing to raise funds; mudârabah contracts are also
used for the management of mutual funds (Nedal, 2017).
In Musharakah banking, the Islamic bank contributes the depositors' funds to a joint
enterprise with the client (an entrepreneur). Generally, the Islamic bank allows the client
to manage all the affairs of a Musharakah business. The Islamic bank and the client
mutually share the profit or loss made on the Musharakah investment. In a typical PLS
arrangement, an Islamic bank provides the risk capital to a firm in which professional
managers are responsible for making strategic and operational decisions. The bank shares
in profits and is liable to any financial loss. There is no serious problem with this
arrangement if the bank is able, and is allowed, to monitor business operations of the
firm. However, proper monitoring mechanisms are yet to be devised for PLS, especially
in case of Mudaraba that does not provide any control rights to the financier (the Islamic
bank in this case). Fiqh literature on this issue is quite out-of-date and needs serious
reconsideration. For example, Saleh (1986) lists three rights and one responsibility of the
financier in a Mudaraba arrangement. The rights include ensuring that the borrowing
13
entrepreneur (firm) complies with the terms of the contract, sharing profits, and limited
liability in case of loss. The sole responsibility is handing over the Mudaraba capital. He
also outlines two rights and two responsibilities of the borrower.
The rights include conducting the business with an appropriate degree of freedom, and
accounting decisions. The responsibilities are compliance with the terms of the contract,
and liquidation of the Mudarabah business at the end of the contract. The modern use of
Mudaraba as a mode of financing obviously requires more than such preliminary
specification of rights and responsibilities. There is a need for construction of
standardized PLS contracts, or by laws, in the light of the legal frameworks of Muslim
countries.
2.4.2 Murabaha (Cost-Plus Sales Contract)

This type of contract is mostly used in the procurement of equipment. It is a sales
contract between Islamic bank and its client at a fixed profit called mark-up. Under the
Murabaha arrangement, the client makes a promise to buy specified goods from the
Islamic bank on a deferred payment basis. The Islamic bank purchases goods from the
original supplier and sells them on to the client after adding its own profit margin.
2.4.3 Musharekah (Equity Partnership)

Musharakah is a contract in which two or more persons contribute capital for the
establishment of a particular business venture in such a way that each partner has right to
either involve in the administration of the business or not. However, partners may decide
to be active or sleeping partner at their own will. In this kind of transaction in Islamic
banking, profits are shared based on agreed ratio which need not be equal to their
individual capital contribution, but loss is shared strictly based on individual capital
contribution. So, Islamic bank will act as a partner in this case in order to contribute to
the capital formation as well as in sharing profits and loss.
14
2.4.4 Ijarah (Lease Financing)
The features of Ijarah financing are very similar to those of conventional lease financing.
However, unlike in the conventional lease contract, Shariah holds the leaser responsible
for all damage, repairs, insurance and depreciation of the leased asset. The leaser should
also bear the risk of uncertainty attached to the useful life of the leased asset. In other
expressions, Ijarah is a contract whereby an Islamic bank purchases an asset and leases it
out to its client on the agreement that the client will be paying a fixed amount at regular
interval usually monthly for a specified period of time to the Islamic bank. It may also
include the option of the client purchasing the asset at the end of the contract from the
bank.
Islamic financial institutions mostly rely on leasing, known as Ijarah wa iqtina, for
meeting financing needs in the real estate, retail, industry and manufacturing sectors.
Leasing enjoys strong support from Shariah scholars and bears a close resemblance to
conventional leasing (Iqbal, 2000).
2.4.5 Bai Salam (Advance Payment)

It is a sale contract whereby Islamic bank agrees to supply some specific commodities to
the buyer (its client) at a future date that is specified in exchange of an advanced full spot
payment to the bank. That is, the client pays the full amount and delivery of the
commodity to the client is done in specific future date by the Islamic bank. Bai salam and
bai istisna are forward sale contracts in which the seller pays in advance the price of
goods that are to be delivered to him at a specified future date. Bai salam was widely
practiced in the Arabian agricultural sector long before the dawn of Islam. This
instrument was best suited to meet the financing needs of the farming and manufacturing
industries in the Islamic economy. Shariah stipulates that the terms and conditions of bai
salam and bai istisna contracts, such as price, quantity and quality of goods, should be
clearly determined without involving any features of interest, gharar (speculation) or
dubious sale (Iqbal, 2000).
15
2.4.6 Bai Istisna (Procurement Engagement)
It is a contract in which a party orders another to manufacture and provide a commodity,

the description of which, delivery date, price and payment date are all set in the contract.
It is used by Islamic banks, and consists of two separate Istisna contract.
2.5 Empirical Studies of the challenges of IFB
2.5.1 Lack of adequate knowledge and unfavorable attitude towards IFB services
and products
Up-to-date related literature indicated that adequate knowledge and favorable attitude
towards the use of IFB products and services become too decisive for the expansion
of the service itself as well as the growth of IFB. For instance, (Jorg & Kermit, 2004)
investigated the relationship between university students‟ knowledge of Islamic and
conventional banks in the United Arab Emirates. Their sample comprised six hundred
and seventy six graduate and undergraduate students at the School of Business and
Management at the American University of Sharjah. This sample contained both Arab
and non-Arab students who purportedly may have different attitudes towards Islamic
and conventional methods of finance. Their major finding was found that the more
education completed tended to improve financial knowledge of both conventional and
Islamic finance.
Moreover, In the city of Adelaide in Australia, 300 Muslims were surveyed regarding
their awareness of Islamic banking products by (Rammal &Zurbrugg, 2007).Their results
illustrated that the majority of the respondents were interested and prepared to use
Islamic methods of finance, but they were not properly informed about their function. In
other words, even though most of the respondents had knowledge about availability of
Islamic financial products, they were still unaware regarding the basic Islamic banking
principles and specific Islamic methods of finance such as profit/loss sharing contracts.
They added that the lack of awareness and experience with “halaal” (in accordance with
Islamic Shariah) products were not to be a damage to the willingness for respondents to
use Islamic methods of finance even profit/loss sharing contracts.
16
Khattak & Rehman ( 2010) also investigated the relationship between customer
satisfaction and awareness of Islamic banking system in Pakistan banking industry by
taking a sample of 156 respondents from different cities in Pakistan. The respondents
expressed their satisfaction to some of the services and dissatisfaction with a few,
although overall the customers were mostly satisfied with the Islamic banking services
provided to them. It was found that the awareness level with regard to the general
products but were unaware of the different Islamic financial products such as Mudarabah
and ijarah.
In addition, Mark (2010) studied the differences in attitude and perception towards
Islamic banking between Muslims and non-Muslims by taking a sample of 200
Malaysians – 100 Muslims and 100 non-Muslims in Klang valley of Malaysia and found
that Muslims are supportive of Islamic banking while non-Muslims view Islamic banking
as relevant primarily to Muslims. In line with this, Haque (2010) conducted a face to face
interview of 473 Malaysian customers to study the attitudinal difference of Malaysian
customers about Islamic banking and found Malaysian consumers have positive attitude
towards Islamic banking and a significant attitudinal difference exists only between
Malay & Chinese and between Chinese & Indian, while the overall attitudes of all three
races were positive towards Islamic banking.
A study carried out by Mohammad et al. (2014) across the four cities of North India
found that both Muslims and non-Muslims showed a positive attitude towards Islamic
banking. In a similar study, Nissar & Sudalai (2013) analyzed the demographic variables
on attitude towards Islamic Banking by carrying out an empirical study based on primary
data collected from 6 states in India and found that despite the significant growth of
Islamic finance globally in 100 countries, Muslims in India have no idea and are not
aware of the facts, issues and practices of Islamic banking and finance. They suggested
that there was a need to conduct campaigns for creating awareness on the practice of
Islamic banking and finance.
17
2.5.2 Shortage of Sheria Experts and Trained Man Power
Islamic banking is a very fast industry that does not lack capital but expertise and
uniformity (Laldin, 2011). As the sector continues to grow, it is becoming increasingly
important for banks to ensure that their employees receive the training and resources to
follow both Shariah principles and traditional compliance laws. Banks must act now to
provide documentation and training for their employees. It is only with a knowledgeable,
educated staff that Islamic financial institutions can survive and compete (Eagle, 2009).
In their research, Haji et al. (2009) confirmed that one of the main challenges of Islamic
banking is the lack of expertise to perform the Shariah review. Most of the time, auditors
lack the Shariah background and the Shariah employees lack also the experience and
training to perform effective and efficient Shariah-compliant operations.
There has been an acute shortage of human capital resources in the Islamic banking
industry. Islamic banking personnel are largely drawn from conventional banking. They
are neither properly trained nor devoted to learning and practicing Sharia-compliant
banking. They are interested only in eliminating interest from Islamic banking operations
without realising the true objective behind this exercise (Abdulmalik, 2006).According to
the executive director of the International Shariah Research Academy for Islamic
finance, 80% of Islamic financial products are merely Islamised versions of conventional
ones. Incumbent banks and new market entrants are facing vastly different market
conditions and need to develop new sources of differentiation beyond compliance with
shariah to compete or remain successful in the future (Vayanos et al., 2008)
Most professional and training courses tend to be geared towards conventional banking
rather than Islamic banking. In reality, there are a limited number of institutions and
schools which offer training for Islamic institutions (Karbhari et al., 2004). So, after
properly documenting all policies and procedures, there is need for Islamic financial
institutions to educate their personnel to understand the principles of Shariah. However,
training for employees on both general and Islamic banking principles does not have to
be a costly or timely expenditure. ELearning is a cost effective way to educate employees
on general banking principles, as well as on Islamic banking law (Eagle, 2009). Eagle
added that by providing eLearning training to its employees, a financial institution will
18
eliminate the need for costly and time-consuming in-house training. ELearning eliminates
or greatly reduces the cost of travel, instructor time, materials and lost work days.
ELearning provides a program that can be used for refresher training and new-hire
training. Many larger conventional banks have a specialized function to educate
employees and ensure ongoing adherence to Islamic principles (Hunt, 2009). Training
will not only help bank employees to become familiar with general banking principles, it
will also teach them about the complex regulations that apply to Islamic products and
services. Through these training programs, employees will gain the knowledge and tools
needed to benefit the customer-banking relationship (Eagle, 2009). Mohamed (2013)
conducted a research on factors influencing the growth of Islamic banks in Kenya and
confirmed that shortage of professionals in the Islamic banking sector was evident.
2.5.3 Lack of Market based Intermediation and Products

Up-to date literatures in the field of Islamic finance indicated that the availability of
intermediation based on the current market is too decisive in the financial transaction in
the era of globalization. For instance, PWC (2013) confirmed that the demand for
Islamic finance services has been increasing due to growing Muslim populations in
countries especially in Asia and Africa, which currently account for over 95% of
the world‟s Islamic population and which are projected to increase by 35% by 2030.
Moreover, Mutua (2017) revealed that the demand for Islamic finance had been
increasing due to the growing Muslim population.
2.5.4 Legal system (regulatory plate form and government supports)

In many non-Muslim countries, Islamic and conventional banks are not on a level playing
field, as there are numerous legal and tax restrictions that make it difficult for Islamic
banks to compete. For example, in many jurisdictions, Islamic real estate financing
through the diminishing musharaka technique leads to a double taxation, with
conveyance duty on the acquisition of the real estate (Khan & Bhatti , 2006). In addition
to that, the challenge facing Islamic banks is not only to offer products that cover the
same scope as those of conventional banks, but also to ensure that their products are
19
different from those of their Islamic peers. In this regard, having a well-honed product
development capability is paramount (Dusuki & Abdullah, 2007).
Furthermore, Wako et al (2014), in their literature review noted commercial banks

cautioning of possibility of Islamic Banks operating within the existing legal and
regulatory framework, which posed a great challenge, after all. In part, all banks offering
Islamic banking have established their own separate Shariah Board to supervise and offer
guidance to their respective banks on Islamic banking system. Islamic banking industry
has been trying for the last over two decades to extend its outreach to bring it at least to
the level of conventional banking. But the absence of Shariah-compliant legal framework
needed to make interest-free banking acceptable (and create sound financial institutions)
is the major snag behind its low penetration in the financial market (Kinyanjui, 2013).
2.6 Research Gap

Based on the foregone review of literatures, it becomes clear that there has been
no empirical studies conducted on the challenges of IFB expansion in any setting of
Ethiopia. Therefore, this pioneering research tried its contribution to fill this gap and
is carried out to examine the potential challenges of IFB products and services by
studying the knowledge and attitude levels, Sheriah scholars and trained employees,
market based intermediation and products, and legal system.
2.7 Conceptual Framework of the study

The conceptual framework of the study displays the logical organization of interrelated
concepts within the selected theoretical frameworks. Therefore, to have a comprehensive
understanding of the possible factors affecting the expansion of IFB services and
products, the conceptual framework of this study was designed, based on the existing
theoretical literatures related to Islamic banking and finance coupled with early thoughts
on the topic raised.
As displayed in the figure below, the conceptual framework of this study comprises four
interrelated issues that entirely supposed to show the existing relationship between the
independent variables (the four issues as listed below) and dependent variables
20
(expansion of IFB). The conceptual framework of this thesis indicated that if customers
have adequate awareness and favorable attitude towards the existing IFB services and
products provided by CBE along with conventional banking systems, the expansion of
the IFB will be more likely provided that the other factors remain constant. Likewise, in
the era of globalization, to execute interest free financial services effectively, qualified
employees and Sheriah scholars are indispensable. Therefore, if the bank has educated
employees and Sheriah scholars who involve in the operation of IFB services and
products, the expansion of the IFB will be more likely given the other factors hold
constant.
Moreover, market based entrepreneur become the milestone of implementing the IFB
services and products in the banking industry. Thus, the availability of market based
intermediation which provides savers with an outlet for their funds whereas at the
same time providing funds to borrowers for their expenditure can affect the
expansion of IFB services and products. In addition, well established regulatory
platforms and government support enhance the possibility of the expansion of IFB
services and services provided that the factors remain constant.
21
Perception of employees
towards Customers‟ knowledge
& Attitude to IFB
Shariah Scholars & trained

employees
Expansion of Interest
Free Banking
Market based Intermediation

and Products
Regulatory plate form and

Government supports
Figure 2.1: Conceptual Framework of the Study
Source: Developed by the Researcher Based on the Relevant Literatures (2019)
2.8 Summary
This chapter reviewed literatures in the Islamic Banking field, particularly on the
challenges that affect the expansion of IFB products and services. From the literature, the
main pillar of Islamic Finance is prohibition of interest unlike in conventional banking
where interest is a key factor in the banking system. It also illustrates the theories related
to Islamic banking, conceptual literatures on the topic of the discussion and the empirical
studies of the challenges of IFB products and services.
The next chapter discusses the methodology to be applied to carry out the study. This
section underlines research design, population and sample design, research procedures,
data collection and analysis methods.
22
UNIT THREE
RESEARCH METHODOLOGY
3.1 Introduction
This section of the study highlights the research methods used in collecting and analyzing
data from the sample respondents and the collected data using appropriate instruments,
respectively. The chapter also shows the process of the study or how the study was
conducted using the selected research tool. Moreover, the chapter attempts to disclose the
detailed accounts of methods involved in data acquisition and analysis, including the
study design, methods of data collection, population and sampling procedures, reliability
and validity of instruments and data analysis techniques. Definitions and measurements
of variables and ethical consideration are also treated in this chapter. A short summary of
the methods used to address the specific objectives and answer the research questions are
also presented in the final section of the chapter. The insights gained from this chapter
will provide essential information about the general procedure of the research process
that could be applied in the subsequent chapters.
3.2 Research Design

Research design refers to the framework in which the research fits depend on the theory
and nature of the research problem. This will underpin all of the research activities
(Walliman, 2006). According to Creswell (2009), a research design is the conceptual
framework within which a research was conducted. To achieve the above mentioned
research objectives, a descriptive research design was adopted. According to Kothari
(2004) descriptive research studies are those studies which are concerned with
describing a particular individual or group. It is a study with clearly stated investigative
questions and with a clear cut definition of the population to be studied. Moreover,
According to Orodho and Kombo (2009), a descriptive survey design is a method of
collecting information by interviewing or administering a questionnaire to a sample of
individuals. The same source also noted that a descriptive survey design can be used
when collecting information about peoples‟ attitudes, opinions, habits or any of the
variety of education or research social issues. This study sought to collect opinions
from the respondents on factors affecting the expansion of IFB services and products
23
in Ethiopia, west Addis district. the challenges that have hindered the growth of the
bank and finally, In addition, the study adopted a quantitative research approach in
addressing the research objectives of the study.
3.3 Population and Sampling Procedures
3.3.1 Population
Population is a relatively large collection of people, groups or categories, items or
cases that a researcher studies and about which generalizations are made (Andersen &
Taylor, 2012). It is also defined as totality of any group of subject sharing some
characteristics (Boone, & Sabo, 2013). This study considered IFBW line employee,
customer service manager, Customer service officer, Business quality control manager,
branch manager and operational manager are the target population in which the required
data was collected. The choice of such population was deemed to be most appropriate for
this study because they are majorly involved in IFB operations; hence their opinions offer
reliable information for this study. The total sample size of the study was 96. However,
due to the presence of 6 un-returned questionnaires, the sample size was limited to 90.
24
Table 3.1 Number and Name of Sample Banks with Their Allocated Questionnaires
Name of Selected Number of Questionnaires

Banks from West
Addis District Distributed Collected
Anwar mesgid 6 6
Alem Bank 6 5
Addis ketema 6 6
Abakoran 6 6
Kole 6 5
Mehal gebeya 6 6
Bethel 6 5
Sefare Selam 6 6
Somale tera 6 6
Paulos 6 6
Atana tera 6 6
T/haimanot 6 6
Alem gena 6 5
18 mazoria 6 5
H/georgis 6 6
Keranio 6 5
Total 96 90
Source: Field Survey (2019)
3.3.2 Sampling Design
Sampling Frame
Kothari (2004) describes a sampling frame as a list of all the items or names from a
population or universe, from which a sample is to be drawn. He emphasizes that such
a list should be comprehensive, reliable , appropriate and representative of the
sample. The sampling frame was developed from the list of commercial banks of
Ethiopia in west Addis district and a list of employees directly related to IFB operation.
This list was comprehensive since it consists of all the employees, which have directly
related with IFB within the banks. These help to ensure the representativeness of the
sample.
25
Sampling Procedures
Sampling is a procedure, process or technique of choosing a sub-group from a population
to participate in the study (Ogula, 2005). It is the process of selecting a number of
individuals for a study in such a way that the individuals selected represent the large
group from which they were selected. Therefore, multistage purposive sampling
techniques were employed. In the first stage, among the commercial banks of Ethiopia
who operate IFB in Addis Ababa, Commercial Banks of Ethiopia was purposively
selected because the bank is dominant enough for supporting huge employees operating
IFB services and products as well as one of the prominent banks in implementing IFB
services and products. In the second stage, among west, east, south and north districts of
Addis Ababa, west district is purposively selected because the district consist of large
number of customers who deposited their savings without interest and used IFB services
and products (see table 3.2).
Table 3.2 Number of IFB Customers by District in Addis Ababa
S.N. District in Number of IFB %

Addis Ababa Customers
1 East 3125
7.1
2 North 5688
13
3 South 2,535
5.8
4 West 32,405
74
Total 44,151 99.9
Source: CBE: MIS, Semi-annual Report as of Dec. 31, 2015
In the third stage, according to the Semi annual report as of March 30, 2019, there are
124 CBE under the west district, 116 of them have been starting IFB services. Therefore,
among these banks, 16 of them were purposively selected on the basis of proximity to the
researcher, which constitute almost 13.79% of the total bank operating IFB under the
west Addis Ababa district. In the fourth stage, since the study focused on challenges of
the growth of IFB in Addia Ababa, the target population has to be employees directly
related to the topic of discussion which was purposifully selected.
26
3.4 Methods of Data Collections
3.4.1 Type and Source of Data

In this study, primarily quantitative data type is used. The quantitative data were derived
from the survey of the respondents who have a direct relation with the topic under
discussion. Secondary data sources which are derived from published and unpublished
reports, the Internets, article, dissertation and theses were also used.
3.4.2 Data Collection Techniques

According to (Levy & Lemeshow, 2001), data are the facts present to the researcher
from the study‟s environment, they include primary and secondary data. Primary
data are the original works of research or raw data without interpretation or
pronouncements that represent an official opinion or position (Chandran, 2004).
According to Bless et al. (2008), secondary information or data sources are data neither
collected by the user nor specifically for the user. Thus involves the collection and
analysis of the published materials and information from internal sources.
Secondary data may be obtained by collecting information from a diverse source
of documentations or electronically stored information.
The study collected primary data using questionnaires. Kothari (2004) describes a
questionnaire as a method of data collection in which a questionnaire consisting of a
number of questions is mailed or delivered to respondents who are then expected to read,
understand and write down the answers on their own. He further describes the merits as
being low costs, freedom from bias of the interviewer, adequacy of time to give well
thought out answers, approachability and access to large samples. Questionnaires further
offer the benefit of the option anonymity to the respondents, enabling them to offer more
authentic information.
Structured Questionnaires
A structured questionnaire was the most important tool employed in this study because
the quick response in data acquisition is possible (Creswell, 2009). Almost all of the
27
items in the structured questionnaire were close ended. The questionnaire consisted of
two main sections, the first section addressing general demographic data of the
respondent such as age, gender, educational level, years of experience and religious
affiliation. The second section addressed the specific research objectives. This section
covered the main challenges impeding the growth of IFB services and products. A five
point Likert scale was used for closed ended questions.
To investigate the precision and understandability of the questions as well as whether the
questionnaires are able to collect the intended information or not, a pilot study with 20
subjects was carried out. The final version was prepared after incorporating the necessary
modifications. The questionnaire, which was prepared in English language and checked,
was directly distributed to the target population because bank employees believed to
understand English language as most of them have above diploma educational level.
3.5 Validity and Reliability of Instruments

In social science research, ensuring the quality of data gathered and its instruments, on
the one hand, and the accuracy and consistency of results, on the other hand, are very
decisive. Reliability is the ability of an instrument to yield the same results on repeated
trials, even by other researchers (Neale et al, 2004). Validity denotes the ability of the
instrument to produce accurate results that are in agreement with theoretical values and to
measure what is supposed to be measured (Mwanje, 2001). Therefore, validity, in this
research, is tested with the purpose of drawing more credible and defensible analytical
generalizations of the result about the population of the study sites. This was done
through pilot survey and discussion with concerned experts prior to the actual data
collection processes. The reliability, particularly internal consistency (or homogeneity)
aspect of the reliability of the instruments was assessed by means of Cronbach‟s
Coefficient Alpha method and confirmed that, as the value was above 0.71, the
instrument was consistent over periods (see annex x).
28
3.6 Methods of Data Analysis
Before processing the responses, data preparation was done on the completed
questionnaires by editing, coding, entering and cleaning the data. Data collected was
analyzed using descriptive statistics. The descriptive statistical tools helped in describing
the data and determining the respondents‟ degree of agreement with the various
statements under each objective. Data analysis was done using Statistical Package for
Social Sciences (SPSS) and Microsoft Excel spread sheet to generate quantitative
reports which were presented in the form of tabulations, percentages, mean and
standard deviation in presenting a clear picture of the factors influencing the growth of
IFB in Ethiopia. In particular, the analysis of the challenges of the growth of IFB emanate
from the five scale likert scale accordingly. The analysis was made in respect to
answering the research questions.
3.7 Summary
This chapter aimed to assess the methods of data collection and analyses related to the
topic under discussion. To this effect, utmost investigations have been made to look
through how the pioneer scholars and proponents have addressed the aforesaid problem.
As noted in the introduction part of this chapter, the study followed the principles of
quantitative research methods in which data were collected from purposively selected
banks‟ employees.
This chapter has also described and explained the research design, population and
sampling design of the study, data types and sources, data collection instruments. It has
further detailed the data collection methods, research procedure and methods to be used
in the analysis of data. The next chapter follows the collection of data will present the
key findings of study accompanied with the discussion based on the research questions.
29
UNIT FOUR
DATA ANALYSES AND DISUSSIONS
4.1 Introduction
This section instigates with a presentation of data analysis and interpretation of
information on the challenges of the growth of Interest Free Banking (IFB) among
selected banks of west district of Commercial banks of Ethiopia, Addis Ababa. These
include the provision and analysis of data with respect to whether there was adequate
knowledge and favorable attitude towards IFB services and products, shortage of Sheria
experts and trained man power, lack of market based intermediation and products legal
system (regulatory plate form and government supports).
A short summary of the overview of the key findings of the study is well presented in the
final segment of this chapter. The insights gained from this chapter will help us to
understand the main findings of the study, contributing a lot for the conclusion and
recommendation part of the chapter.
4.2 Demographic Characteristics of Respondents

The survey has collected a wide range of information which is essential to the
interpretation of the findings and the understanding of the results of the challenges related
to the expansion of IFB in Addis Ababa, Ethiopia. Hence, in this section, the researcher
tried to explain the percentage distribution of demographic characteristics of respondents,
particularly the age and gender of the target population.
In this study, the analysis of demographic features showed that 74.4 % and 23.6% of
respondents were male and female, respectively. Moreover, the survey data showed that
large proportions of respondents were in the age group of 25-29 years (55.6 %).
Significant number of respondents (32.2 %) reported that their age was between 30-35
years. Besides, 7.8% of the respondents affirmed that their age was greater than 35 and
only 4.4 % of the target population acknowledged that their age was less than 25 years.
30
Table 4.1 Percentage Distributions of Respondents by Demographic Characteristics
Characteristics Classification Number %

Gender Male 67 74.4
Female 23 23.6
Total 90 100
Age <24 4 4.4
25-29 50 55.6
30-34 29 32.2
>35 7 7.8
Total 90 100
Source: Survey Data, 2019
4.3 Socio-Economic Characteristics of Respondents

Literatures indicated that analyzing the socio-economic status of the target population is
too indispensable in order to have general understanding about the background of the
study subjects and speculate the potential findings. Hence, as it can be seen in Table 4.2,
analysis of the educational status of respondents revealed that the majority (70%) of the
respondents have degree holders. Significant numbers of the respondents (27.8%) have
masters‟ degree and only 2.2% of the target population have diploma. It seems surprising
to see no one of the respondents have a PhD holder, indicating that operation in banking
need not necessary a higher level of educational status. This might be because as long as
the employees have basic knowledge of accounting and management, they can execute
the entire tasks with respect to the principle and regulation of the bank. On the other
hand, more than a quarter of the respondents have Master holder, indicating that the
banking industry is nearly performs its duties with professionals.
31
Table 4.2: Socio-Economic Status of Respondents
Characteristics Classification Number %
Level of Diploma 2 2.2

Education Degree 63 70
Masters 25 27.8
PhD 0 0
Total 90 100
Years of
Experience < 2 years 4 4.4
2-4 Years 35 38.9
5-7 Years 33 36.7
8-10 Years 9 10
> 10 Years 9 10
Total 90 100
Religion
Orthodox 45 50
Christian
Muslim 30 33.3
Protestant 10 11.1
Catholic 2 2.2
Others 3 3.3
Total 90 100
Source: Survey Data (2019)
As it can be shown in Table 4.2 above, analysis of years of experience of respondents

indicated that 38.9%, 36.7% and 4.4% of the respondents had 2-4 years, 5-7yeras and less
than 2 years of working experience. Moreover, 10% of the respondents had 8-10 years of
experience. Similarly, the percentage share of respondents who had more than 10 years of
experience constituted 10% of the total respondents. In terms of religion affiliation, 50%,
33.3%, 11.1% and 2.2% of the respondents acknowledged that they were following
Orthodox Christian, Islam, Protestant and Catholic religion, respectively. Moreover, 3.3
% of the respondents reported that they were following Adventist and Feka Waka.
32
4.4 Challenges of IFB expansion
Literatures all over the world, particularly in Ethiopia were dominated by the challenges
of Islamic banking or interest free banking which is given along with the conventional
banking system. However, in this chapter, an attempt is made to assess the main
impediments that affect the expansion of IFB services and products by thorough
reviewing of the potential constraints.
4.4.1 Lack of Adequate Knowledge and unfavorable Attitude towards IFB

Services and Products
Adequate knowledge and favorable attitude towards IFB services and products are
believed to be very important in the business industry both in developed and developing
world. The level of understanding, awareness, and knowledge of the public in general
and, bankers and customers in particular are the cornerstones for the development of any
banking service. This is particularly true in banking service like Interest free banking,
which is still emerging in Ethiopia. However, research finding indicated than even many
managers of commercial banks and staffs of interest free banking department/division
who are responsible for operating and marketing Interest free banking products are not
very well trained in Interest free modes of finance (Jemal, 2018). Moreover, the greater
awareness about the product and service offered by Islamic windows of commercial
banks on the sides of the customers will enhance the continued growth of this type of
banking service. Therefore, under here, the researcher of this thesis tried her best to
explain whether lack of adequate knowledge and unfavorable attitude towards IFB
services and products becomes the challenges of IFB expansion in Ethiopia or not.
33
50.0 45.6 45.6
45.0 41.1
40.0
34.4
35.0 31.1 32.2
30.0 25.6 24.4
25.0
20.0 17.8 17.8 17.818.9
15.6 15.6 14.4 14.4
13.3 13.3
15.0 11.1 12.2 10.0 11.1
10.0 7.8
5.6
5.0 3.3
0.0
IFB products and Lack of education on Lack of proper Banks authorities and Customers have
services are largely IFB services and mechanism of shareholders remain a negative attitude
unknown in Ethiopian products transparency & lot to promote IFB towards IFB services
finance market disclosure to the services and products and Products
public to ensure
consumer protection
Strongly Dis agree
Disagree
Neutral
Agree
Strongly Agree
Figure 4.1 Adequate knowledge and favorable Attitude towards IFB Product and Services
Source: Own Computation Based on Survey Data, 2019
In doing so, based on related literatures, five questions related to knowledge and
attitude towards IFB products and services were prepared and provided to the
respondents. Therefore, as clearly depicted on Figure 4.1, most amusingly, equal
number of respondents (44.4%) was answer affirmatively and negatively to the claim
that IFB products and services are largely unknown in Ethiopian finance market
where as relatively small percentage (11.1%) of the respondents became neutral to
the point under investigation. This implies that the majority (44.4%) of respondents
answer affirmatively to the question “is inadequate knowledge and unfavorable
attitude towards IFB products and services became one of the challenges of IFB
expansion in Ethiopia”; however, the opposite was true. This might be because of the
fact that awareness and attitude are considered to be the two critical tools in which
they ensure to participate in business activity. In addition to analyzing the frequency
34
distributions of respondents‟ response on the question “IFB product and services are
not largely known in Ethiopia”, computing the average value of the responses leads
to sound conclusion. Consequently, as clearly displayed in Table 4.1, the overall
average score of the respondents were 2.99. Moreover, classification of the mean
value displayed that 55.6% of the respondents‟ response lay above average score
while 44.4% of their response was fail below average score. This result is exactly the
same with the frequency distributions value displayed above in figure 4.1.
This result is in harmony with some previous research findings. For instance, Tsion
(2017) confirmed that lack of awareness by customers about IFB services,
institutional, the need for special regulations and lack of specialized human resource
were the main challenges in implementing IFB system in her study on the challenges
and opportunities of interest free banking in Ethiopia. Mutua (2017) also conducted a
research on factors affecting the growth of Islamic banking in Kenya and confirmed
that Islamic banks and Islamic banking products remain largely unknown and
misunderstood in the Kenyan market.
Moreover, Jemal (2018) conducted a research on practices and challenges of interest

free banking windows of commercial banks in Ethiopia and found that only 21.3%
of his study subjects were reported that they had awareness about IFB products and
services. His findings further indicated that even the majority of the branch
managers and staffs of interest free banking department have little awareness
about most of Interest free banking products and services. Moreover, he found
that the majority of account holders little aware or unaware for most of interest free
products. Most of them have familiarity only with Al-Wadiah, Amana and Quard
saving. Furthermore, Yewubdar (2018) done a research entitled on prospects and
challenges of interest free banking in Ethiopia in the case of commercial bank of
Ethiopia, North Addis district. She confirmed that lack of Shariah advisor, lack of
supportive regulatory directives, lack of awareness of customer about IFB products
and absence of equity markets were the major challenges to deliver IFB services.
35
To assure whether the lack of education about IFB product and services became one
of the challenges to the expansion of IFB in Ethiopia or not, the researcher tried to
assess the degree of responses of the target population. Thus, as displayed on Figure
4.1, the majority of respondents (45.6%) of them were “agree” to the assertion that
lack of education about IFB product and services became one of the challenges to
the expansion of IFB. Besides, 13.3% of the respondents “strongly disagree” to the
statement lack of education about IFB product and services became one of the
challenges to the expansion of IFB. Moreover, 17.8%, 15.6%, and 7.8% of the
respondents were “disagree”, “neutral” and “strongly disagree”, respectively to the
claim on the lack of education about IFB product and services became one of the
challenges to the expansion of IFB in Ethiopia. This might be because of the fact that
education is number one instrument that helps to participate actively in business
transaction through banking system.
As shown in table 4.1, the overall value of mean responses on the question “IFB
product and services became one of the challenges to the expansion of IFB in
Ethiopia” was 3.39. Regarding the classification based on the mean value shows that
58.9% of the respondents‟ responses fail above average. Likewise, Mutua (2017)
also conducted a research on factors affecting the growth of Islamic banking in
Kenya and confirmed that lack of education on Islamic banking and products was
one of the challenges of the growth of Islamic banking in Kenya, Jemal (2018) also
confirmed that in the process of offering interest free banking services, inadequate
training and education facilities are the main challenges affecting the growth of IFB
services and products.
With regard to proper mechanism of transparency and disclosure to the public to

ensure consumer protection from any risk, 45.6% of the respondents were “agree” to
the statement that the lack of proper mechanism of transparency and disclosure to the
public to ensure consumer protection became one of the challenges to the expansion
of IFB. Moreover, 25.6%, 15.6%, 10% and 3.3% of the respondents were “neutral”,
“disagree”, “strongly agree” and “strongly disagree”, respectively to the claim on
36
lack of proper mechanism of transparency and disclosure to the public to ensure
consumer protection became one of the challenges to the expansion of IFB in
Ethiopia. This implies that the majority of the respondents cited lack of proper
mechanism of transparency and disclosure to the public to ensure consumer
protection as a challenge to the expansion of IFB in Ethiopia. in tandem to the above
findings, the overall value of mean responses on the question “Lack of proper
mechanism of transparency & disclosure to the public to ensure consumer
protection” was 3.43. Regarding the classification based on the mean value shows
that 55.6% of the respondents‟ responses fail above average.
This finding is corresponding with some previous studies. For instance, Kinyanjui
(2013) found that lack of proper mechanism of transparency and disclosure to
the public in order to ensure consumer protection as required by Shariah can
be a major factor affecting the growth of Islamic banking. Moreover, Mutua (2017)
confirmed that lack of proper mechanism of transparency and disclosure to the
public in order to ensure consumer protection is one of the main factors affecting the
growth of Islamic banking in Kenya.
As far as efficient and inclusive promotion towards IFB services and products is
concerned, banks‟ authorities and shareholders expected to take the line share of the
activity. However, Figure 4.2 depicted that 41.1% of the respondents were “agree” to
the claim that banks authorities and shareholders remain a lot to promote IFB
services and products. The analysis of the study also revealed that 24.4%, 17.8%,
11.1% and 5.6% of the respondents were “neutral”, “disagree”, “strongly agree” and
“strongly disagree”, respectively to the assert on the banks‟ authorities and
shareholders remain a lot to promote IFB services and products in Ethiopia. This
indicated that efficient and inclusive promotion of IFB services and products became
questionable as large proportion of the respondents witnesses the reality. This is
because of the fact that, now days, we are living in the era of globalization where the
world is entirely linked spatially, promotion plays a significant role on the
37
profitability of any firms. Moreover, as displayed in table 4.1, the overall value of
mean responses on the question “Banks authorities and shareholders remain a lot to
promote IFB services and products given” was 3.34. Regarding the classification
based on the mean value shows that 52.2% of the respondents‟ responses fail above
average. A similar result was reported by Mutua (2017).
Attitude towards any activities is very important to execute any activities or not. In
this regard, the analysis showed that 34.4% of the respondents were “agree” to the
statement customers have negative attitude towards IFB services and products.
Moreover, 15.5%, 17.8%, 14.4% and 14.4% % of the respondents were “neutral”,
“disagree”, “strongly agree” and “strongly disagree”, respectively to the claim that
customers have negative attitude towards IFB services and products became one of
the challenges to the expansion of IFB in Ethiopia. “Customers have negative
attitude towards IFB services” was 3.17. Regarding the classification based on the
mean value shows that 48.9% of the respondents‟ responses fail above average This
finding is consistent with some of the previous research findings. For instance,
Mohamed (2013) conducted a research on factors influencing the growth of Islamic
Banking in Nairobi, Kenya and found that more than 50% of the respondents rated
the services they receive from the bank as excellent, reflecting high levels of
customer satisfaction among the bank„s customers, indicating that favorable attitude
towards IFB services. Moreover, Jemal (2018) assured that most of the customers
are uncertain about Interest free banking service given by the commercial banks
as a viable and dependable alternative for conventional banking services. He
further noticed that, customers use Interest free window of the commercial bank as a
last alternative and basically for safety purpose rather than considering it as
alternative to do business.
38
Table 4.3 Mean and Percentage Distributions of Knowledge and Attitude Related
Questions
SN Questions Mean SD. Position from Num %

Value Mean ber
1 IFB products and services are largely 2.99 1.29 Below Mean 40 44.4
unknown in Ethiopian finance market Above Mean 50 55.6
2 Lack of education on IFB services and 3.39 1.16 Below Mean 37 41.1
products Above Mean 53 58.9
3 Lack of proper mechanism of transparency 3.43 0.98 Below Mean 40 44.4
& disclosure to the public to ensure Above Mean 50 55.6
consumer protection
4 Banks authorities and shareholders remain a 3.34 1.07 Below Mean 43 47.1
lot to promote IFB services and products Above Mean 47 52.2
given
5 Customers have negative attitude towards Below Mean 46 51.1
IFB services Above Mean 44 48.9
To sum up, whether the lack of adequate knowledge and unfavorable attitude
towards IFB became one of the challenges of IFB expansion in Ethiopia or not, all
the potential indicators listed above indicated that the majority of respondents
responded affirmatively to the five knowledge and attitude related question. Thus,
synthesis of the results of the five scales likert type questions showed that almost
more than half of the respondents‟ witness the lack of insufficient knowledge and
negative attitude towards IFB services and products given by the CBE became the
main challenges of the expansion of IFB in Ethiopia. This might be attributed to the
fact that knowledge and attitude towards IFB products and services is too
indispensable for the participation of the banking industry.

In the era of globalization, availability and accessibility of adequate Sheriah scholars
and trained employees on IFB services and products are thought to be crucial in the
banking industry. Therefore, under here, the researcher of this thesis tried her best to
analysis whether lack of Sheriah scholars and trained employees of IFB services and
products became one of the challenges of IFB expansion in Ethiopia or not. To
39
assure these, on the basis of related literatures, five related questions were designed
and provided to the respondents in order to have clear understanding on the topic
raised.
50.0
45.6
45.0
40.0
40.0
35.6
35.0 32.2
30.0
30.0 26.7
25.0 23.3 22.2
20.0 21.1 20.0
17.8 18.9 18.9 17.8
20.0 16.7
15.8
15.0 13.3 13.3
11.1 11.1
8.9 8.9
10.0 6.7
4.4
5.0
0.0
Lack of sharia IFB is threated by IFB faces a IFB window line There is absence of Strongly Dis agree
scholars who give chronic problem of challenge of employees have trainings, works
advisory services Sharia experts and developing not adequate shops, seminars Disagree
to the bank and trained employees innovative services knowledge about targeting on IFB Neutral
comprehend the due to absence of IFB services and
sharia trained employees products Agree
and experts Strongly Agree
Figure 4.2 Shortages of Sheriah Experts and Trained Man Power
Source: Own Computation Obtained from Survey Data, 2019
As depicted in Figure 4.2, the analysis of the study demonstrated that 40% of
respondents were “agree” to the assertion that lack of Shariah scholars who give
advisory services to the bank and comprehend the Islamic Shariah became one of the
challenges to the expansion of IFB. Moreover, 11.1%, 26.7%, 17.8% and 4.4% of
the respondents were “disagree”, “neutral”, “strongly agree” and “strongly disagree”,
respectively to the claim on lack of Shariah scholars who give advisory services to
the bank and comprehend the Islamic Shariah became one of the challenges to the
expansion of IFB in Ethiopia. In addition to analyzing the frequency distributions of
respondents‟ response on the question “lack of Shariah scholars who give advisory
40
services to the bank and comprehend the Islamic Shariah”, computing the average
value of the responses believed to be feasible and apt. Consequently, as clearly
displayed in Table 4.2, the overall average score of the respondents were 3.56.
Moreover, classification of the mean value displayed that 57.8% of the respondents‟
response lay above average score while 42.2% of their response was fail below
average score. This result is exactly the same with the frequency distributions value
displayed above in figure 4.2. That is, 57.8% of the respondents answer affirmatively
for the question under investigation.
Consistent with the present findings, Yewubdar (2018) done a research entitled on
prospects and challenges of interest free banking in Ethiopia in the case of
commercial bank of Ethiopia, North Addis district. She confirmed that lack of
Shariah advisor, lack of supportive regulatory directives, lack of awareness of
customer about IFB products and absence of equity markets were the major
challenges to deliver IFB services. The analysis also indicated that 35.6%,18.8%,
23.3%, 13.3% and 8.9% of the respondents were “agree”, disagree”, “neutral”,
“strongly disagree” and “strongly agree” respectively to the claim on IFB is threaten
by chronic problem of Shariah experts and trained employees in Ethiopia. This
implies that the majority (45.5%) of the target population answer affirmatively to the
assertion on IFB is threaten by chronic problem of Shariah experts and trained
employees though the business industry is new for Ethiopians. In the same vein,
Tasmir (2018) conducted a research on the determinants of Islamic banking in Saudi
Arabia and found that the major constraints impeding Islamic banking growth
include regulations, tax rates and skilled labor force. Moreover, Jemal (2018) found
that lack of skilled and trained professionals to fulfill the requirements of the
growing Interest free banking service in the country is a major challenge to the
promotion and growth of interest free banking in Ethiopia.
With regard to the development of innovative services, 45.6% of the respondents

were “agree” to the statement that IFB faces a challenge of developing innovative
services due to absence of trained employees and experts became one of the
41
challenges to the expansion of IFB. Moreover, 20%, 18.9%, 8.9% and 6.7% of the
respondents were “neutral”, “disagree”, “strongly agree” and “strongly disagree”,
respectively to the claim on IFB faces a challenge of developing innovative services
due to absence of trained employees and experts in Ethiopia. This implies that more
than half of the respondents (54.5%) of the respondents answer affirmatively to the
statement “IFB faces a challenge of developing innovative services due to absence of
trained employees and experts, indicating how much trained experts and employees
play decisive role in the expansion of interest free banking industry”. Moreover, as
clearly displayed in Table 4.2, the overall average score of the respondents were
3.08. In addition, classification of the mean value displayed that 44.5% of the
respondents‟ response lay above average score while 55.6% of their response was
fail below average score. This result is the synonymous with the frequency
distributions value displayed above in figure 4.2.
The present finding is in harmony with some previous research findings. For
instance, Tsion (2017) confirmed that lack of awareness by customers about IFB
services, institutional, the need for special regulations and lack of specialized human
resource were the main challenges in implementing IFB system in her study on the
challenges and opportunities of interest free banking in Ethiopia.
Up to date literatures indicated that, in Ethiopia, the IFB services along with
conventional banking operation is threatened by critical shortage of Shariah scholars
and trained man power (Tsion, 2017). In tandem to this general indication, as
displayed in figure 4.2, the analysis of this study exhibited that 30% and 20% of the
respondents were “agree” and “strongly agree” to the assertion that IFB window line
employees have not adequate knowledge about IFB services and products,
respectively. However, 21.1% and 13.3% of the respondents were “disagree” and
“strongly disagree” the claim that IFB window line employees have not adequate
knowledge about IFB services and products, respectively. The analysis also
indicated that significant proportion of the respondents (15.8%) were not given
positive or negative answer to the assertion that IFB window line employees have
42
not adequate knowledge about IFB services and products. Moreover, as shown in
Table 4.2, the overall average score of the respondents who answer “IFB services
along with conventional banking operation is threatened by critical shortage of
Shariah scholars and trained man power” were 3.31. In addition, classification of the
mean value displayed that 54.4% of the respondents‟ response lay above average
score while 45.6% of their response was fail below average score.
Concomitant with the present finding, Jemal (2018) conducted a research on

practices and challenges of interest free banking windows of commercial banks in
Ethiopia. His finding indicates that lack of supervision by NBE, lack of confidence
and trust of clients, lack of legal support from government, lack of qualified human
resource, lack of cooperation among Islamic windows, lack of infrastructure suitable
for Interest free banking operation, and doubt of clients identified by the
practitioners as major challenges in the process of offering interest free banking
Trainings, works-shops and seminars on once job are supposed to empower the
capacity, skill and performance of the employees. In this regard, the analysis of this
study showed that 32.2% and 16.7% of the respondents were “agree” and “strongly
agree” to the assertion that there is absence of trainings, works shops and seminars
targeting on IFB, respectively. On the other hand, 22.2% and 17.8% of the
respondents were “disagree” and “strongly disagree” the claim that there is absence
of trainings, works shops, seminars targeting on IFB, respectively. This implies that
nearly half of the respondents acknowledged that absence of trainings; works shops
and seminars on IFB become one of the challenges that retard the expansion of IFB
in Ethiopia. This might be because of the fact that the presence of trainings,
workshops and seminars has the capacity of developing once capacity of performing
the respective tasks. Moreover, as revealed in Table 4.2, the overall average score of
the respondents who answer “the claim that there is absence of trainings, works
shops, seminars targeting on IFB” was 3.22, having equal proportion of respondents
above and below the mean score. In line with the present finding, Jemal (2018)
43
confirmed that in the process of offering interest free banking services, inadequate
training and education facilities are the main challenges affecting the growth of IFB
services and products.
Table 4.4: Mean and Percentage Distributions of Sheriah Experts and Trained Man
Power
S Questions Mean SD. Position from Num %

N Value Mean ber
1 Lack of Sharia scholars who give advisory 3.56 1.61 Below Mean 38 42.2
services to the bank and comprehend the Above Mean 52 57.8
Sharia and the reality of the bank industry
2 IFB is threaded by chronic problem of 3.08 1.2 Below Mean 50 55.5
Shariah experts and trained employees Above Mean 40 44.5
3 IFB faces a challenge of developing 3.31 1.08 Below Mean 41 45.6
innovative services due to absence of trained
Above Mean 49 45.6
employees and experts
4 IFB window line employees have not 3.22 1.34 Below Mean 45 50
adequate knowledge about IFB services and
products in accordance with Sharia law Above Mean 45 50
5 There is absence of trainings, works shops, 1.489 0.50 Below Mean 46 51.1
seminars targeting on IFB to enhance the
Above Mean 44 48.9
capacity of employees
4.4.3 Lack of Market Based Intermediation and Products
In the era of globalization where the world is ties within a fraction of seconds,
accessibility of market based intermediation and products on IFB services and
products are expected to be decisive in the banking industry. Therefore, under here,
the researcher of this thesis tried to analysis whether lack of intermediation and
products of IFB services and products became one of the challenges of IFB
expansion in Ethiopia or not. To assure these, based on review of related literatures,
five related questions were designed and provided to the respondents in order to have
clear understanding on the availability of market based intermediation and products
in the business industry in Ethiopia.
44
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Strongly Dis agree
There is not There is no much IFB exposed to There is There is smaller
adequate IFB choices on IFB liquidity problem incompleteness of economics of scale Disagree
customers/ products and due to lack of traditional compared to the
Neutral
demand services compared developed money financial IFB conventional one.
to conventional market and the instrument Agree
one shortage
Strongly Agree
Figure 4.3 Market Based Intermediation and Products
Source: Own Computation from Survey Data, 2019
As depicted in Figure 4.3, the analysis of this study showed that 11.1% and 4.4% of
the respondents were “agree” and “strongly agree” to the assertion that there is not
adequate IFB demand (customer), respectively. Nonetheless, 44.4% and 28.9% of
the respondents were “disagree” and “strongly disagree” to the claim that there is not
adequate demand or customers of IFB, respectively. The analysis also indicated that
significant proportion of the respondents (11.1%) was not given positive or negative
answer to the assertion that there is not adequate demand or customers of IFB. This
implies that close to three-fourth (73.3%) of the respondents acknowledged that IFB
has adequate demand or customer. Moreover, computing the average value of the
responses believed to be indispensable for the analysis. Accordingly, as clearly
displayed in Table 4.3, the overall average score of the respondents were 2.18 with a
SD of 1.107. Likewise, classification of the mean value displayed that 26.7% of the
45
fail below average score. This result is exactly the same with the frequency
distributions value displayed above in figure 4.3. That is, 73.3% of the respondents
answer negatively for the question under investigation.
This finding is in agreement with findings by PWC (2013) who found that
the demand for Islamic finance services has been increasing due to growing
Muslim populations in countries especially in Asia and Africa, which currently
account for over 95% of the world‟s Islamic population and which are projected to
increase by 35% by 2030. Moreover, Mutua (2017) revealed that the demand for
Islamic finance had been increasing due to the growing Muslim population.
Now days, in the era of globalization coupled with free market economy,
computation in both provision of quality services and choices of product types play a
significant role in attracting customers. Therefore, the analysis of this thesis
exhibited that 43.3% and 24.4% of the respondents were “disagree” and “strongly
disagree” to the assertion that there is no much choices on IFB products and services
compared to conventional banking system, respectively. Nevertheless, 14.4% and
4.4% of the respondents were “agree” and “strongly agree” to the assertion that there
are no much choices on IFB products and services compared to conventional
banking system, respectively. Besides, 13.3% of the respondents were not given
positive or negative answer to the assertion that there are no much choices on IFB
products and services compared to conventional banking system. This implies that
the majority of the respondents (67.7%) gave negative response to the assertion that
there are no much choices on IFB products and services compared to conventional
banking system in Ethiopia. This might be attributed to the fact that, in part, the
newness of the business, and in part, less awareness about IFB and critical shortage
of trained employees. Concomitantly, as clearly exhibited in Table 4.3, the overall
average score of the respondents were 2.31 with a SD of 1.128. Additionally,
classification of the mean value displayed that 32.2% of the respondents‟ response
lay above average score while 67.8% of their response was fail below average score.
46
Consistent with the present findings, the majority of Mutua‟s (2017) study subjects
were neutral as to whether Islamic financial institutions did not have complete item
alternatives for all kinds of traditional financial solutions. Moreover, Yewubdar
(2018) done a research entitled on prospects and challenges of interest free banking
in Ethiopia in the case of commercial bank of Ethiopia, North Addis district. She
confirmed that lack of Shariah advisor, lack of supportive regulatory directives, lack
of awareness of customer about IFB products and absence of equity markets were
the major challenges to deliver IFB services.
The banking industry is sometimes exposed to liquidity problem that hinder the
possibility of development both in terms of capacity and profit. In this respect, as
shown in figure 4.3, the analysis of this study demonstrated that 24.4% and 13.6% of
the respondents were “disagree” and “strongly disagree” to the assertion that IFB
exposed to liquidity problem due to lack of developed money market and the
shortage of short term investment security, respectively. The analysis also showed
that, 25.6% and 3.3% of the respondents were “agree” and “strongly agree” to the
assertion that IFB exposed to liquidity problem due to lack of developed money
market and the shortage of short term investment security. Besides, close to one-
third (31.1%) of the respondents were not given positive or negative answer to the
assertion that IFB exposed to liquidity problem due to lack of developed money
market and the shortage of short term investment security. This implies that the
majority of the respondents (38%) did not give positive response to the assertion that
IFB exposed to liquidity problem due to lack of developed money market and
shortage of short term investment security in Ethiopia. Computing the average value
of the responses, as clearly displayed in Table 4.3, the overall average score of the
respondents were 3.42 with a SD of 1.112. Moreover, classification of the mean
value displayed that 60% of the respondents‟ response lay above average score while
40% of their response was fail below average score..
In line with the present finding, Muhamed & Yameen (2013) conducted a research
on the determinants of Islamic banking profitability in Malaysia. They confirmed
47
that financial market development and market concentration has a significant
positive impact in determining the profitability of Islamic banking in Malaysia.
Financial institutions should have a complete mechanism by which the financial

transactions flow in and out based on their rules and regulations. In this regard, the
analysis of this study revealed that 21.1% and 7.8 % of the respondents were
“disagree” and “strongly disagree” to the assertion that there is incompleteness of
traditional financial IFB instrument, respectively. Nonetheless, the analysis also
illustrated that, 32% and 8.9% of the respondents were “agree” and “strongly agree”
to the assertion that there is incompleteness of traditional financial IFB instruments.
Moreover, 30% of the respondents were not given positive or negative answer to the
assertion that there is incompleteness of traditional financial IFB instruments. This
implies that the majority (40.9%) of the respondents answer affirmatively to the
claim that there is incompleteness of traditional financial IFB instruments. This
needs critical investigation and scholarly view on how to accustomed and
contextualize IFB instruments to the existing situation. Likewise, computing the
average value of the responses displayed that the overall average score of the
respondents was3.49 with a SD of 1.139. Furthermore, classification of the mean
value demonstrated that 41.1% of the respondents‟ response lay above average score
while 58.9% of their response was fail below average score.
In line with the present study finding, Mutua (2017) confirmed that there was the
perception that the Islamic Banks do not fully adhere to Shariah guidelines
which led to low uptake. Moreover, According to Walid (2015), Islamic finance
products and services are often accused of mimicking those of the conventional
financial system and hence do not fully adhere to Shariah guidelines. Tsion (2017)
confirmed that lack of awareness by customers about IFB services, institutional, the
need for special regulations and lack of specialized human resource were the main
challenges in implementing IFB system in her study on challenges and opportunities
of interest free banking in Ethiopia. Moreover, Jemal (2018) conducted a research on
practices and challenges of interest free banking windows of commercial banks in
48
Ethiopia. His finding indicates that lack of supervision by NBE, lack of confidence
and trust of clients, lack of legal support from government, lack of qualified human
resource, lack of cooperation among Islamic windows, lack of infrastructure suitable
for Interest free banking operation, and doubt of clients identified by the
practitioners as major challenges in the process of offering interest free banking
As clearly displayed in Figure 4.3, 30% and 14.4% of the respondents were “agree”
and “strongly agree” to the assertion that there is smaller economics of scale
compared to the conventional one, respectively. The figure also depicted that, 21.1%
and 15.6 % of the respondents were “disagree” and “strongly disagree” to the
assertion that there is smaller economics of scale compared to the conventional one,
respectively. This implies that according to the findings of this study smaller
economics of scale become one of the critical challenges that hold back the
expansion of IFB in Ethiopia. Similarly, computing the average value of the
responses displayed that the overall average score of the respondents was 3.389 with
a SD of 1.139. Furthermore, classification of the mean value demonstrated that
44.4% of the respondents‟ response lay above average score while 55.6 % of their
response was fail below average score
Likewise, Jemal (2018) conducted a research on practices and challenges of interest

free banking windows of commercial banks in Ethiopia. His finding indicates that
lack of supervision by NBE, lack of confidence and trust of clients, lack of legal
support from government, lack of qualified human resource, lack of cooperation
among Islamic windows, lack of infrastructure suitable for Interest free banking
operation, and doubt of clients identified by the practitioners as major challenges in
the process of offering interest free banking services in Ethiopia.
49
Table 4.5: Mean and Percentage Distributions of Market based Intermediation and
Products Related Questions

Value Mean ber
3 Lack of proper mechanism of 2.77 1.102 Below Mean 36 40
transparency & disclosure to the public to Above Mean 54 60
ensure consumer protection
4 Banks authorities and shareholders remain 3.13 1.093 Below Mean 53 58.9
a lot to promote IFB services and Above Mean 37 41.1
products given
5 Customers have negative attitude towards 3.07 1.314 Below Mean 50 55.6
4.4.4 Legal System (Regulatory Plate Form and Government Supports)
In any banking system, the underline legal system should be in a position of

supporting and monitoring the overall business transactions. In this regard, the
analysis of the study indicated that 42.2 % and 24.4% of the respondents were
“agree” and “strongly agree” to the assertion that IFB faced lack of effective
supervisory framework and it is one of the weaknesses of the prevailing system,
respectively. Moreover, 18.9 % and 7.8 % of the respondents were “disagree” and
“strongly disagree” to the assertion that IFB faced lack of effective supervisory
framework and it is one of the weaknesses of the prevailing system, respectively.
This implies that according to the findings of this study two-third (66.6%) of the
respondents answered affirmatively to the claim that IFB faced lack of effective
supervisory framework and it is one of the weaknesses of the prevailing system in
Ethiopia.
50
50.0
44.4
45.0
42.2
40.0
36.7
35.0
30.0 28.9
27.8
26.7 26.7
25.6
24.4
25.0 23.3
22.2 22.2
21.1
20.0
20.0 18.9 18.9
16.7
15.0
11.1
10.0 7.8 7.8 7.8
6.7
4.4 4.4
5.0 3.3
0.0
IFB faced lack of The NBE IFB services faced IFB operation is The role of other
effective Directive blocked lack of prudential still under the banks brings Strongly Dis agree
supervisory the ongoing regulation on the conventional bank unique challenges Disagree
framework and it is initiatives for concerned bodies system pressure on IFB services
one of the the establishment provided by CBE Neutral
weakness of of a full-fledged Agree
prevailing system interest free
banking Strongly Agree
Figure 4.4 Legal System (Regulatory Plate form and Government Support)
Source: Own Computation from Survey Data, 2019
In addition to analyzing the percentage distributions of respondents against each

question, considering the mean value of the responses seem to be critical. In this
regard, as displayed in Table 4.4, computing the average value of the responses
displayed that the overall average score of the respondents was 3.57 with a SD of
1.264. Moreover, classification of the mean value demonstrated that 66.7% of the
fail below average score. This result is consistent with some previous research
findings. For instance, Tasmir (2018) conducted a research on the determinants of
Islamic banking in Saudi Arabia and found that the major constraints impeding
Islamic banking growth include regulations, tax rates and skilled labor force.
Likewise, Jemal (2018) conducted a research on practices and challenges of interest
free banking windows of commercial banks in Ethiopia. His findings indicted that
51
lack of legal support from government is a big problem for the development of
interest free banking in Ethiopia.
The establishment of a full-fledged interest free banking in Ethiopia requires

acceptance and permission of NBE. However, as displayed in figure 4.4, 25.6 % and
28.9% of the respondents were “agree” and “strongly agree” to the assertion that the
NBE directive blocked the ongoing initiatives for the establishment of a full-fledged
interest free banking, respectively in Ethiopia. Likewise, 11.1 % and 7.8 % of the
respondents were “disagree” and “strongly disagree” to the assertion that the NBE
directive blocked the ongoing initiatives for the establishment of a full-fledged
interest free banking, respectively. This implies that more than half (54.5%) of the
respondents answered positively to the claim that the NBE directive blocked the
ongoing initiative for the establishment of a full-fledged interest free banking.
Likewise, computing the average value of the responses displayed that the overall
average score of the respondents was 3.57 with a SD of 1.237. Also, classification of
the mean value demonstrated that 54.4% of the respondents‟ response lay above
average score while 45.6% of their response was fail below average score. This
finding was corresponding with Mutua (2017) findings in which no Shariah-
compliant legal framework needed to make interest-free banking acceptable in
Kenya.
Literatures indicated that business organizations, particularly the banking industry

need regular supervision and auditing. Therefore, as shown in Figure 4.4, 36.7 % and
16.7% of the respondents were “agree” and “strongly agree” to the assertion that IFB
services faced lack of prudential regulation on the concerned bodies, respectively in
Ethiopia. Likewise, 18.9 % and 4.4% of the respondents were “disagree” and
“strongly disagree” to the assertion that the IFB services faced lack of prudential
regulation on the concerned bodies, respectively. This implies that more than half
(53.4%) of the respondents answered positively to the claim that the IFB services
faced lack of prudential regulation on the concerned bodies. Similarly, computing
the average value of the responses displayed that the overall average score of the
52
respondents was3.42 with a SD of 1.112. Besides, classification of the mean value
demonstrated that 53.3% of the respondents‟ response lay above average score while
46.7% of their response was fail below average score
Consistent with this finding, Tsion (2017) confirmed that lack of awareness by
customers about IFB services, institutional, the need for special regulations and lack
of specialized human resource were the main challenges in implementing IFB
system in her study on challenges and opportunities of interest free banking in
Ethiopia. Moreover, Yewubdar (2018) done a research entitled on prospects and
challenges of interest free banking in Ethiopia in the case of commercial bank of
Ethiopia, North Addis district. She confirmed that lack of Shariah advisor, lack of
supportive regulatory directives, lack of awareness of customer about IFB products
and absence of equity markets were the major challenges to deliver IFB services.
However, to the opposite of this finding, Shaik (2014) found that Islamic financial
institutions do not have complete item alternatives for all kinds of traditional
financial solutions.Besides, Ahmed & Noor ( 2011) illustrated that Islamic banks
have limited product range for firms that require finance in already ongoing projects
in which lumpy investments had been made. Such opposing findings were attributed
to the fact that the difference in the nature of the study subjects.
The first and foremost requisite for a true Islamic window is that it is carefully
separated from the general side of the conventional bank Usmani (2002 cited in
Jemal, 2018). Unless, the IFB service is separated from the conventional ones, the
pressure on it is believed to be un-avoidable. Separation is not only a physical
partition in a branch between Islamic windows and the conventional section, but also
separation in all kinds of activities, functions, recording and reporting. In this regard,
the survey result indicated that 44.4 % and 21.1% of the respondents were “agree”
and “strongly agree” to the assertion that IFB operation is still under the pressure of
conventional banking system, respectively in Ethiopia. Moreover, the analysis
indicated that 22.2 % and 7.8 % of the respondents were “disagree” and “strongly
disagree” to the assertion that IFB operation is still under the pressure of
53
conventional bank system, respectively. This implies that 65.5% of the respondents
answered affirmatively to the claim that the IFB operation is still under the pressure
of conventional banking system, respectively in Ethiopia. This indicated that the IFB
services and products are under the influence of conventional banking system.
However, Critics of the concept of Islamic finance do not see any difference
between Islamic and conventional economics, and if any exists, it is artificial in
nature and not substantive in any way (Hafeth, 2006). In the same line, Mutua
(2017) confirmed that Islamic banks products were different from products and
services provided by conventional banking, indicating that unavailability of visible
pressure.
In addition, as shown in Table 4.4, computing the average value of the responses
displayed that the overall average score of the respondents was3.49 with a SD of
1.265. Furthermore, classification of the mean value demonstrated that 65.6% of the
fail below average score
As clearly depicted in Figure 4.4, the survey result demonstrated that 22.2 % and 3.3
% of the respondents were “disagree” and “strongly disagree” to the assertion that
the role of other banks brings unique challenges on IFB services provided by CBE,
respectively. However, 27.8 % and 20% of the respondents were “agree” and
“strongly agree” to the assertion that the role of other banks brings unique challenges
on IFB services provided by CBE, respectively in Ethiopia. This implies that 47.8%
of the respondents answered positively to the claim that the role of other banks
brings unique challenges on IFB services provided by CBE in Ethiopia. This
indicated that the IFB services and products provided by CBE are affected by other
commercial banks due to the prevailing competition following free market economy
implemented by the Ethiopian government. Likewise, computing the average value
of the responses displayed that the overall average score of the respondents was
3.389 with a SD of 1.139. Furthermore, classification of the mean value
54
demonstrated that 47.8% of the respondents‟ response lay above average score while
52.2% of their response was fail below average score
Table 4.6: Mean and Percentage Distributions of Legal System Related Questions

Value Mean ber
3 Lack of proper mechanism of 3.42 1.112 Below Mean 42 46.7
transparency & disclosure to the public to Above Mean 48 53.3
ensure consumer protection
4 Banks authorities and shareholders 3.49 1.265 Below Mean 31 34.4
remain a lot to promote IFB services and Above Mean 59 65.6
products given
5 Customers have negative attitude towards 3.589 1.13 Below Mean 47 52.2
4.5 Summary
Chapter four gave a detailed account of the research findings and discussion with the
previous research findings. It showed the demographic and socio-economic information of
the respondents like their gender, age, years of experience, main position held in the bank
and religion. The chapter also highlighted the main factors that contribute or affect the
expansion of IFB in Ethiopia. The synthesis of the results of the five scales likert type
questions, related to adequate knowledge and attitude towards IFB services and products,
showed that almost more than half of the respondents‟ witness the lack of sufficient
knowledge and negative attitude towards IFB services and products given by the CBE
became the main challenges of the expansion of IFB in Ethiopia. This might be attributed to
the fact that knowledge and attitude towards IFB products and services is too indispensable
for the participation of the banking industry.
55
The analysis of the main points of the study indicated that the percentage of the
respondents, who confirmed that the lack of Sheriah scholars and trained employees were
the main challenges of the expansion of IFB in Ethiopia, outnumbered than those
respondents who deny this claim.
Syntheses of the five questions related to market based intermediation and products inform
as a fascinating and varying results. That is, IFB system has adequate demand or customers
and has multiple choices of products and services. However, relatively higher proportion of
respondents confirmed the incompleteness of traditional IFB instruments and smaller
economic of scale compared to the conventional banking system.
Close analysis of the questions related to the legal system displayed that almost more than
half of the respondents answered affirmatively to the first four questions related to the topic
raised, i.e., whether the regulatory platform and government support became one of the
challenges to the expansion of IFB services and products in Ethiopia. However, relatively
less than half of (47.8%) the respondents answered positively to the claim that the role of
other banks brings unique challenges on IFB services provided by CBE in Ethiopia. This
indicated that the IFB services and products provided by CBE are affected by other
commercial banks due to the prevailing competition following free market economy
implemented by the Ethiopian government.
56
UNIT FIVE
CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions
The main objective of the study was to investigate the main challenges to the expansion of
IFB services and products in Commercial Banks of Ethiopia, west Addis district. To attain
the main intents of the study, the required information were drawn both from primary and
secondary sources. Purposive sampling method was used to select 16 banks among 116
banks operating interest free services in the west Addis district and 90 bank‟s employees
who are directly related to the topic. Five point likert scale structure questionnaire was
main means to acquire the primary data. Secondary data were also used to supplement the
primary data. In analyzing and interpreting the primary data, quantitative research
techniques had been employed. SPSS version 24 and Microsoft Excel Spread Sheet soft
wares were used to analyze the quantitative data. Statistical tools like percentages and
means were employed and the findings were displayed in tables and figures. Hence, in this
chapter, the author draws together the key findings of the research in view of addressing
and answering research objectives and questions, respectively. Following the conclusion
remarks on the key findings, the possible recommendations were forwarded.
5.1.1 Lack of Adequate Knowledge and unfavorable Attitude towards IFB

Services and Products
The services and products of IFB given by CBE is faced with a number of challenges
that make the growth of this interest free banking system make an uphill task. One of
the great challenges that hindered the growth of IFB services and products is that
Islamic banking products remain largely unknown and misunderstood in the
Ethiopian market which may be attributed to lack of education on Islamic banking.
Thus, the synthesis of the results of the five scales likert type questions, related to
adequate knowledge and attitude towards IFB services and products, showed that
almost more than half of the respondents‟ witness the lack of sufficient knowledge
and unfavorable attitude towards IFB services and products given by the CBE
57
became the main challenges of the expansion of IFB services and products in
Ethiopia. This might be attributed to the fact that knowledge and attitude towards
IFB products and services is too indispensable for the participation of the banking
industry. Thus, it seems to be fair to conclude that the existing knowledge and
attitude towards IFB deter the expansion of IFB services and products in Ethiopia.

Now a day, more than half of the conventional commercial banks in Ethiopia are
adopting interest free banking service. This might be attributed to the fact that
interest free banking services are increasingly important within banks, particularly
Muslim dominant countries like Ethiopia, as banks started to enjoy the benefits from
Muslims‟ financial transactions. However, the findings of the study indicated that the
commercial banks of Ethiopia are highly suffered from critical shortage of Sheria
experts and trained man power. This has its own direct and adverse impact on the
execution of services and provision of Islamic products according to the Sheriah
Law. This might be resulted in the creation of unsatisfied customers whereby
worsening of the banks‟ operation on the sides of IFB.
5.1.3 Lack of Market Based Intermediation and Products

Financial intermediation has largely been undertaken by the banking sector, as
capital markets remain nascent, under-capitalized and illiquid. As literatures
indicated that the financial intermediation process in the region remains largely
unresponsive to the requirements of structural transformation for building
resilient and competitive economies, the syntheses of the five questions related to
market based intermediation and products inform as a fascinating and varying
results. That is, IFB system has adequate demand or customers and has multiple
choices of products and services. However, the study confirms that relatively higher
proportion of respondents confirmed the incompleteness of traditional IFB
instruments and smaller economic of scale compared to the conventional banking
system. Therefore, it is possible to conclude that the financial intermediation and
market based products remain a lot to support the existing IFB services and products
58
5.1.4 Legal System (Regulatory Plate Form and Government Supports)
Up to date literatures indicated that despite making up over 30 percent of Ethiopia's
population, Muslims‟ wish to have an interest-free banking system has long been
ignored, forcing believers into conventional banking, which many see as sinful.
However, the NBE directives permitted to get the services along with conventional
banking rather than permitting a fully fledged interest free banking. In line with this
indication, the study found that the majority (far more than half) of the respondents
confirmed that IFB faced lack of effective supervisory framework, the NBE directive
blocked the ongoing initiatives for the establishment of a full-fledged interest free
banking, IFB services faced lack of prudential regulation on the concerned bodies
and IFB operation is still under the conventional bank system pressure.
The study also found that relatively less than half (47.8%) of the respondents
answered positively to the claim that the role of other banks brings unique challenges
on IFB services provided by CBE in Ethiopia. Therefore, it seems to be fair to
conclude that the regulatory plate forms and government support of IFB services and
product expansion are under question by any measurements.
5.2 Recommendations
Based on the major findings and conclusion remarks made so far, the following
points are forwarded as recommendations in order to have clear understanding about
the critical challenges that affect the growth of IFB services and in Ethiopia.
 As the study found that the majority of the respondents‟ witness the lack of sufficient
knowledge and unfavorable attitude towards IFB services and products given by the
CBE became the main challenges of the expansion of IFB services and products in
Ethiopia, training targeting on creation of awareness and perceptions of Islamic
finance products and services should be given to both the Muslims and non-Muslims
communities by the existing Sheriah scholars and well trained employees. Moreover,
it is possible to disseminate the products and services of IFB given by CBE through
59
brusher, pamphlet, news paper, mass media and legal wabe pages to create
awareness and have favorable attitude towards the services and products.
 Since the study concludes that the commercial banks of Ethiopia are highly suffered
from critical shortage of Sheria experts and trained man power, the responsible
bodies like higher officials of the bank together with the religious leaders shall be in
a position to ask the government in order to open Islamic college (university) in
which capable and competitive graduates are produced.
 The study indicated that relatively higher proportion of respondents confirmed the
incompleteness of traditional IFB instruments and smaller economic of scale
compared to the conventional banking system. Thus, Sheriah scholars tried their best
in contextualization of the Sheriah law with the existing reality and boards of the
bank should be allotted adequate capitals that support effectively the IFB services
and products.
 The analysis of the study showed that the IFB faced lack of effective supervisory
framework, the NBE directive blocked the ongoing initiatives for the establishment
of a full-fledged interest free banking, IFB services faced lack of prudential
regulation on the concerned bodies and IFB operation is still under the pressure of
conventional banking. Therefore, the NBE and the Ethiopian government had better
to be in a position to laid dawn sound regulatory plate form and support toward the
expansion of IFB services and product in accordance with Sheriah Law.
5.3 Research Limitations and Future Research Directions

The study has some potential limitations. Since the target population are busy of
doing their regular duties, scarcity of time to fill the questionnaire was the major
problem facing while data collection. Nonetheless, the researcher tried here best of
convincing the responsible and target groups through informed consent. Moreover,
critical shortage of related literature on the challenges of interest free banking
expansion in Ethiopia. However, the author of the study used related literatures done
60
abroad rather than finding here in Ethiopia. Since the data collection technique was
purposive, it is difficult to generalize the findings in to the other settings.
This study has added an important knowledge and concepts on the challenges that
affect the growth of IFB among some of the CBE in west Addis, Ethiopia. Therefore,
this research is the beginning of future research endeavors. However, as the study‟s
theme and scope was limited, it did not have adequate space to deal with all the issues
related to the problem under discussion. Thus, considering the limitations of the study
and recommendations of the researcher, further study is needed in order to enrich
knowledge related to the challenges of IFB expansion and solve the aforementioned
problem more scientifically.
61
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Tsion Sisay. (2017). Challenges and opportunities of interest free banking in Ethiopia. Addis
Ababa University, Ethiopia: Unpublished MA thesis.
Uzair, M. (1955). An Outline of `Interestless Banking. Karachi: Raihan Publication.
Vayanos, P., Wackerbeck, P., Golder, P., &Haimari, G. (2008). Competing Successfully in
Islamic Banking. Berut: Booz and Company.
Yewubdar Getachew. (2018). Prospects and Challenges of Interest Free Banking in Ethiopia in
the case of commercial bank of Ethiopia, North Addis district. Addis Ababa:
Unpublished MA Thesis, St.Mary's University.
65
Appendices
St. Mary University
School of Graduate Studies
Department of Business Administration (MBA)
Dear Respondents:
I am Neima Abdu, a Masters student at St. Mary‟s University School of graduate studies in
the Department of Business Administration (MBA). Currently I am conducting a research
that aims at investigating “the Challenges on Interest Free Banking (IFB) Expansion in
Commercial Bank of Ethiopia: A Case Study on the West Addis Ababa District”. The
purpose of the study is for the partial fulfillment of the requirement for MBA Program.
For the successful accomplishment of the study, the response of employees of the bank
will have pivotal role by being used as valuable input for the study. You have been
selected purposefully from the employees in your branch. I assure you that the
information to be shared by you will be used only for academic purpose and kept
confidential. So, you are kindly requested to genuinely fill the questionnaire.
Thank you in advance for your cooperation!
Part One: Demographic and Socio-economic related questions

Please tick (“√”) on the box next to the option that best applies to you.
1. Age:_____________
2. Gender: Male , , Female
3. Level of Education: Diploma , Degree , MA (MSc) , PhD
4. Main Job (function) : IFBW line employee , Customer service manager
Customer relationship officer , Business quality control officer
Branch Manager , Operational manager
Others (Specify)__________
5. Years of Experience: less than years , 2-4years , 5-7 years ,
8-10years , above 10 years
6. Religion: Orthodox Christian , Muslim , Protestant , Catholic
Others (Specify)____________
66
Part Two: Challenges of Interest Free Banking (IFB) expansion
On a scale of 1-5 where 1= strongly disagree, 2=disagree, 3= neutral, 4= agree, 5= strongly
agree. Please rate the following statements in regards to the challenges facing on the growth of
Interest Free Banking in Ethiopia by Putting “√” on your choice.
I. Lack of Adequate Knowledge and unfavorable Attitude towards IFB Services

and Products
S. Questions Strongly Dis Neutral Agree Strongly
N. dis Agree (3) (4) agree
agree(1) (2) (5)
1 IFB products and services are largely unknown in
Ethiopian finance market
2 Lack of education on IFB services and products
3 Lack of proper mechanism of transparency &
disclosure to the public to ensure consumer
4 protection
Banks authorities and shareholders remain a lot to
promote IFB services and products given
5 Customers have negative attitude towards IFB
services as it is given along with the conventional
banking system (wrong association with religion)
II. Shortage of Sheria Experts and Trained Man Power
S.N. Questions related to sharia experts and Trained Strongly Dis Neutral Agree Strongly
man power dis agree Agree agree
1 Lack of sharia scholars who give advisory
services to the bank and comprehend the sharia
and the reality of the bank industry
2 IFB is threatened by chronic problem of Sharia
experts and trained employees
3 IFB faces a challenge of developing innovative
services due to absence of trained employees
and experts
4 IFB window line employees have not adequate
knowledge about IFB services and products in
accordance with Sharia law
5 There is absence of trainings, works shops,
seminars targeting on IFB to enhance the
capacity of employees
67
III. Lack of Market Based Intermediation and Products
S.N. Questions related to market based Strongly Dis Neutral Agree Strongly
intermediation and Products dis agree Agree agree
1 There is not adequate IFB customers/ demand
2 There is no much choices on IFB products and
services compared to conventional one
3 IFB exposed to liquidity problem due to lack
of developed money market and the shortage
of short term investment securities
4 There is incompleteness of traditional financial
IFB instrument
5 There is smaller economics of scale compared
to the conventional one.
IV. Legal System (Regulatory Plate Form and Government Supports)
S.N. Questions related to Legal system Strongly Dis Neutral Agree Strongly
dis agree Agree agree
1 IFB faced lack of effective supervisory framework
and it is one of the weakness of prevailing system
& should deserve series attention
2 The NBE Directive blocked the ongoing
initiatives for the establishment of a full-fledged
interest free banking
3 IFB services faced lack of prudential regulation on
the concerned bodies
4 IFB operation is still under the conventional bank
system pressure
5 The role of other banks brings unique challenges
on IFB services provided by CBE
NB. If you faced others problem, please state it
________________________________________________________
________________________________________________________
68
Appendices II
SPSS output
Statistics
Gender of Age_CAT
Respondents
Valid 90 90
N
Missing 0 0
Gender of Respondents
Frequency Percent Valid Percent Cumulative

Percent
male 67 74.4 74.4 74.4
Valid female 23 25.6 25.6 100.0
Total 90 100.0 100.0
Age_CAT

Percent
1.00 4 4.4 4.4 4.4
2.00 50 55.6 55.6 60.0
Valid 3.00 29 32.2 32.2 92.2
4.00 7 7.8 7.8 100.0
Total 90 100.0 100.0
Statistics
educational Respondents Years of Religion of

level of job Experiences of Respondents
Respondents Respondents
Valid 90 90 90 90
N
Missing 0 0 0 0
69
educational level of Respondents
Percent
deploma 2 2.2 2.2 2.2
degree 63 70.0 70.0 72.2
Valid MA or MSc 25 27.8 27.8 100.0
Total 90 100.0 100.0
Respondents job

Percent
IFB window line employees

21 23.3 23.3 23.3
or officer
customer service manager 23 25.6 25.6 48.9
Customer Service Officer

19 21.1 21.1 70.0
(CSO)
Valid
Busness Quality Control
9 10.0 10.0 80.0
manager
branch manager 8 8.9 8.9 88.9
Operational manager 10 11.1 11.1 100.0
Total 90 100.0 100.0
Years of Experiences of Respondents

Percent
less than 2 years 4 4.4 4.4 4.4
2-4 years 35 38.9 38.9 43.3
5-7 years 33 36.7 36.7 80.0

Valid
8-10 years 9 10.0 10.0 90.0
more than 10 years 9 10.0 10.0 100.0
Total 90 100.0 100.0
70
Religion of Respondents

Percent
orthodox 45 50.0 50.0 50.0
Muslim 30 33.3 33.3 83.3
protestant 10 11.1 11.1 94.4

Valid
catholic 2 2.2 2.2 96.7
others 3 3.3 3.3 100.0
Total 90 100.0 100.0
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
IFB products and services

are largely unknown in 90 1 5 2.99 1.294
Ethiopian finance market
Lack of education on IFB
90 1 5 3.39 1.158
services and products
Lack of proper mechanism
of transparency & disclosure
90 1 5 3.43 .984
to the public to ensure
consumer protection
Banks authorities and
shareholders remain a lot to
90 1 5 3.34 1.072
promote IFB services and
products given
Customers have negative
attitude towards IFB 90 1 5 3.17 1.292
services
Valid N (listwise) 90
71
IFB products and services are largely unknown in Ethiopian finance market

Percent
Strongly Dis agree 12 13.3 13.3 13.3
Disagree 28 31.1 31.1 44.4
Neutral 10 11.1 11.1 55.6

Valid
Agree 29 32.2 32.2 87.8
Strongly Agree 11 12.2 12.2 100.0

Total 90 100.0 100.0
Lack of education on IFB services and products

Percent
Disagree 16 17.8 17.8 25.6
Neutral 14 15.6 15.6 41.1

Valid
Agree 41 45.6 45.6 86.7
Strongly Agree 12 13.3 13.3 100.0
Total 90 100.0 100.0
Lack of proper mechanism of transparency & disclosure to the public to ensure

consumer protection

Percent
Disagree 14 15.6 15.6 18.9
Neutral 23 25.6 25.6 44.4

Valid
Agree 41 45.6 45.6 90.0
Strongly Agree 9 10.0 10.0 100.0
Total 90 100.0 100.0
72
Banks authorities and shareholders remain a lot to promote IFB services and
products given

Percent
Disagree 16 17.8 17.8 23.3
Neutral 22 24.4 24.4 47.8

Valid
Agree 37 41.1 41.1 88.9
Strongly Agree 10 11.1 11.1 100.0
Total 90 100.0 100.0
Customers have negative attitude towards IFB services

Percent
Disagree 16 17.8 17.8 32.2
Neutral 17 18.9 18.9 51.1

Valid
Agree 31 34.4 34.4 85.6
Strongly Agree 13 14.4 14.4 100.0
Total 90 100.0 100.0
Lack of sharia scholars who give advisory services to the bank and comprehend the
sharia

Percent
Disagree 10 11.1 11.1 15.6
Neutral 24 26.7 26.7 42.2

Valid
Agree 36 40.0 40.0 82.2
Strongly Agree 16 17.8 17.8 100.0

Total 90 100.0 100.0
73
IFB is threated by chronic problem of Sharia experts and trained employees

Percent
Disagree 17 18.9 18.9 32.2
Neutral 21 23.3 23.3 55.6

Valid
Agree 32 35.6 35.6 91.1
Total 90 100.0 100.0
IFB faces a challenge of developing innovative services due to absence of trained

employees and experts

Percent
Disagree 17 18.9 18.9 25.6
Neutral 18 20.0 20.0 45.6

Valid
Agree 41 45.6 45.6 91.1
Total 90 100.0 100.0
IFB window line employees have not adequate knowledge about IFB services and
products

Percent
Disagree 19 21.1 21.1 34.4
Neutral 14 15.6 15.6 50.0

Valid
Agree 27 30.0 30.0 80.0
Strongly Agree 18 20.0 20.0 100.0
Total 90 100.0 100.0
74
There is absence of trainings, works shops, seminars targeting on IFB

Percent
Disagree 20 22.2 22.2 40.0
Neutral 10 11.1 11.1 51.1

Valid
Agree 29 32.2 32.2 83.3
Strongly Agree 15 16.7 16.7 100.0
Total 90 100.0 100.0
There is not adequate IFB customers/ demand

Percent
Disagree 40 44.4 44.4 73.3
Neutral 10 11.1 11.1 84.4

Valid
Agree 10 11.1 11.1 95.6
Total 90 100.0 100.0
There is no much choices on IFB products and services compared to conventional

one

Percent
Disagree 39 43.3 43.3 67.8
Neutral 12 13.3 13.3 81.1

Valid
Agree 13 14.4 14.4 95.6
Total 90 100.0 100.0
75
IFB exposed to liquidity problem due to lack of developed money market and the
shortage

Percent
Disagree 22 24.4 24.4 40.0
Neutral 28 31.1 31.1 71.1

Valid
Agree 23 25.6 25.6 96.7
Total 90 100.0 100.0
There is incompleteness of traditional financial IFB instrument

Percent
Disagree 19 21.1 21.1 28.9
Neutral 27 30.0 30.0 58.9

Valid
Agree 29 32.2 32.2 91.1
Total 90 100.0 100.0
There is smaller economics of scale compared to the conventional one.

Percent
Disagree 19 21.1 21.1 36.7
Neutral 17 18.9 18.9 55.6

Valid
Agree 27 30.0 30.0 85.6
Strongly Agree 13 14.4 14.4 100.0
Total 90 100.0 100.0
76
IFB faced lack of effective supervisory framework and it is one of the weakness of
prevailing system

Percent
Disagree 17 18.9 18.9 26.7
Neutral 6 6.7 6.7 33.3

Valid
Agree 38 42.2 42.2 75.6
Strongly Agree 22 24.4 24.4 100.0
Total 90 100.0 100.0
The NBE Directive blocked the ongoing initiatives for the establishment of a full-
fledged interest free banking

Percent
Disagree 10 11.1 11.1 18.9
Neutral 24 26.7 26.7 45.6

Valid
Agree 23 25.6 25.6 71.1
Strongly Agree 26 28.9 28.9 100.0
Total 90 100.0 100.0
IFB services faced lack of prudential regulation on the concerned bodies

Percent
Disagree 17 18.9 18.9 23.3
Neutral 21 23.3 23.3 46.7

Valid
Agree 33 36.7 36.7 83.3
Strongly Agree 15 16.7 16.7 100.0
Total 90 100.0 100.0
77
IFB operation is still under the conventional bank system pressure

Percent
Disagree 20 22.2 22.2 30.0
Neutral 4 4.4 4.4 34.4

Valid
Agree 40 44.4 44.4 78.9
Strongly Agree 19 21.1 21.1 100.0
Total 90 100.0 100.0
The role of other banks brings unique challenges on IFB services provided by CBE

Percent
Disagree 20 22.2 22.2 25.6
Neutral 24 26.7 26.7 52.2

Valid
Agree 25 27.8 27.8 80.0
Strongly Agree 18 20.0 20.0 100.0
Total 90 100.0 100.0
78

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ST.

SCHOOL OF GRADUATE STUDIES

CHALLENGES OF INTEREST FREE BANKING EXPANSION: THE

ADDIS ABABA, ETHIOPIA

BY: NEIMA ABDU

ADVISOR: DR. GASHAW TIBEB

A THESIS SUBMITTED TO ST. MARY UNIVERSITY SCHOOL OF

ADDIS ABABA, ETHIOPIA

SCHOOL OF GRADUATE STUDIES FACULTY OF BUSINESS

CHALLENGES OF INTEREST FREE BANKING EXPANSION: THE

APPROVED BY BOARD OF EXAMINERS

Dean, Graduate Studies Signature

External Examiner Signature

Internal Examiner Signature

Neima Abdu ___________________ _______________

Candidate‟s Name Signature Date

St. Mary‟s University Addis Ababa May, 2019

Dr Gashaw Tibeb, Signature

Name May, 2019

St. Mary‟s University Addis Ababa

CSA: Central Statistical Authority

IFB: Interest Free Banking

IFBW:Interest Free Banking Window

NBE: National Bank of Ethiopia

PLS: Profit and Loss Sharing

PWC: Population World commission

SD: Standard Deviation

SPSS: Statistical Package for Social Science

Figure4.2: Shariah Scholar and Trained Man Power…………………………………………..40

Figure4.3: Market Based Intermediation and Product………………………………………….45

Figure4.4: Legal System (Regulatory Platform and Government support)…………………….51

Table3.2: Number of IFB Customers by District in Addis Ababa…………………………...26

Table4.1: Percentage Distributions of Respondents by Demographic Characteristics……….31

Table 4.2: Socio-Economic Status of Respondents…………………………………………..32

Table 4.3: Mean and Percentage Distributions of Knowledge and Attitude

Key words: Interest free banking, Shariah, likert scale, SPSS

Banking is a financial service that primarily consists of receiving money owned

1.2 Statement of the problem

Tsion (2017) conducted a research on the challenges and opportunities of IFB in

1.4 Objectives of the Study

1.4.1 General Objective

1.4.2 Specific objectives

 To assess whether inadequate knowledge and negative attitude towards IFB

1.5 Significance of the study

1.6 Scope of the Study

1.7 Organization of the Paper

2.2 Over View of Interest Free Banking

2.3 Evolution of Interest Free Banking or Islamic Banking

2.4 Theories of Interest Free Banking or Islamic Finance

2.4.1 Profit and Loss Sharing (PLS) Theory

2.4.2 Murabaha (Cost-Plus Sales Contract)

2.4.3 Musharekah (Equity Partnership)

2.4.5 Bai Salam (Advance Payment)

It is a contract in which a party orders another to manufacture and provide a commodity,

2.5 Empirical Studies of the challenges of IFB

2.5.3 Lack of Market based Intermediation and Products

2.5.4 Legal system (regulatory plate form and government supports)

Furthermore, Wako et al (2014), in their literature review noted commercial banks

Neima Abdu _____ _