PRIME M&E Systemic Pilot Research
Baseline Survey on Financial Institutions Services
Introduction
Sharia compliant products are modes of financing where return of financier is predetermined and fixed but within Sharia constraints. The tools which are relatively harmonizing the operations of Islamic financial system with conventional banking includes Murabaha (cost plus profit sale), Ijara (a rental arrangement), Bai Salam (spot payment for future delivery), Bai Muajjal (sale on deferred payment), Istasna (order to manufacture) and Diminishing Musharaka (house financing) are all Sharia compliant products (Dr. Shaik Abdul 2014).
Sharia-compliant financial inclusion represents the confluence of two rapidly growing sectors: microfinance1 and Islamic finance. With an estimated 650 million Muslims living on less than $2 a day, finding sustainable Islamic models could be the key to providing financial access to millions of Muslim poor who strive to avoid financial products that do not comply with Sharia (Islamic law) (Mayada and Michael 2013: CGAP Focus Note, P.1).
As the bank is dealer of money; and reward for using money is interest according to capitalist system; so the prime source of revenue and cost of funds to conventional banks is charging interest through lending and accepting deposits for interest respectively. Interest is the major driver of operations of conventional banks although other valuable services including guarantees, funds transfers, safety of wealth, facilitation in international trade etc. are also provided for reward and form substantial part of income of banks. As the conventional banks are established under the principles of capitalism and transect business by charging interest, which is unacceptable (forbidden) in Islamic law, so Muslims left with no choice except to establish their own financial institutions under Islamic principles (Dr. Shaik Abdul 2014).
Ethiopia is one of the developing economies in African continent in recent times with around 93 million populations. In this country financial markets and infrastructure areas are in well growing condition in recent times. It is looking like gateway to the African countries. Relating to interest-free banking previous attempts were very less, now it is in booming condition. Recently National Bank of Ethiopia (NBE) directive allowed banks to provide interest-free banking service using a separate window along with their other banking services (Dr. Shaik Abdul 2014).
Significance of the Survey
The survey provides information about the extent to which financial institutions have Sharia-Compliant Products inclusion in their financial services in PRIME Eastern Cluster intervention areas and it also informs the financial institutions future plan to incorporate Sharia-Compliant products. In addition, this survey data is baseline information for PRIME project in order to understand PRIME support to Somali Micro-Finance Institution influence over other financial institutions to incorporate Sharia-Compliant products.
Objectives of the Survey
The main purpose of this baseline survey is to identify whether financial institutions have Sharia-Compliant products inclusion in their financial services especially to provide loan in PRIME project operational areas particularly in Eastern Cluster. The specific objectives are:
· To identify which financial institutions operating in the project areas apply Sharia-Compliant products in their financial services especially for loan services in present condition.
· To understand what kind Sharia-Compliant products and services are available in the financial institutions that exist in PRIME operational areas to facilitate loan services.
· To investigate those Sharia-Compliant products tailored to the livestock sector.
Survey Questions
· Do PRIME’s investments in developing a Murabaha trader credit product with Somali MFI lead / contribute to replication / expansion of sharia products by Somali MFI and/or other FIs in Somali region?
Data Source and Methodology
Nature of Data
The survey used both primary and secondary data. The survey data were both qualitative and quantitative types.
Source of Data
The survey applied mainly primary data source. The primary data collected through interview with the managers of public and private banks as well as micro-finance institutions. Whereas the secondary data obtained from documents available in website.
Sampling Design
In order to understand the existing situation and relevance of the information regarding Sharia-Compliant products inclusion in every financial institutions operating in PRIME operational areas, the survey used purposive sampling methodology. As a result the survey covered 13 financial institutions found in Jigijiga city.
Data Collection
The survey applied interview method to collect primary data. As a result 13 managers of different financial institutions interviewed using open and close ended questions designed for this survey. The survey collected data two times, in the first the data collected information mainly using the survey tool and based on the feedback from the first draft report, the survey collected data for additional information and points that need further elaboration.
Methodology of Data Analysis
In order to analysis the collected data, the method used is descriptive type of data analysis.
Limitation of the Survey
The survey lacks some data like total annual revenue and number of customers that every financial institutions have in PRIME project intervention areas. The information of some banks is not complete because of absence of some banks’ managers during the visit.
Background of the Survey
This baseline information gathered from different public and private financial institutions operating in PRIME Eastern Cluster intervention area particularly in Jigjig city. The main purpose of this survey is to identify presence of any appropriate Sharia-Compliant products inclusion in the financial services of public and private financial institutions.
In Eastern Cluster, 19 financial institutions are providing financial services in PRIME operational areas in general. Specifically, two Micro-Finance Institutions, two public and 14 private banks as well as one Credit and Saving Share Company operating in the Fafan, Jarar and Siti zones of Ethiopian Somali and Dire Dawa City Administration(the project intervention areas). These financial institutions have 86 branches in which Somali Micro-Finance (16 branches) and Commercial Bank of Ethiopia (20 branches) hold the majority branches. As a result seven financial institutions-six banks (one public and five private banks) and one micro-finance institution interviewed in order to see the financial services of these institutions in general and in particular to understand types of Sharia-compliant products that these financial institutions utilize especially for loan disbursement.
Table 1: Financial Institutions in PRIME Intervention Areas and Sharia-Compliant Products Inclusion StatusNo / Name of Financial Institution / # Branches: PRIME Area / # Branches have SCPs / Range of SCPs / When Offered 1st / Specific Location of Branch/s
1 / Commercial Bank of Ethiopia / 20 / 20 / Mudaraba, Murabaha, Wadiah, Qard-Hassen and Istisna / October, 2013
2 / NIB International Bank / 4 / - / Interest free deposit / NA
3 / Awash International Bank / 5 / - / Interest free deposit / NA
4 / Cooperative Bank of Oromia / 6 / Interest free deposit / NA
5 / Wagagen Bank / 5 / - / Interest free deposit / NA
6 / Bank of Abyssinia / 3 / - / Interest free deposit / NA
7 / Somali Micro-Finance Institution / 16 / 16 / Murabaha, Mudaraba, Qad-Hassen, Ijarah and Wadiah / December, 2011
8 / United Bank / 3 / - / Interest free deposit / NA
9 / Oromia International Bank / 3 / 2 / Mudaraba, Murabaha, Ijarah, Istisna, Wadiah and Salam / March, 2014
10 / Abay Bank / 3 / - / Interest free deposit / NA
11 / Lion International Bank / 3 / - / Interest free deposit / NA
12 / Dashen Bank / 3 / - / Interest free deposit / NA
13 / Construction and Business Bank / 1 / - / Interest free deposit / NA
14 / Buna International Bank1* / 1 / - / Not known / NA
15 / Berhan International Bank1* / 1 / - / Not known / NA
16 / Dire Micro-Finance1* / 5 / - / Not known / NA
17 / Development Bank of Ethiopia1* / 1 / - / Not known / NA
18 / National Bank of Ethiopia1* / 1 / - / Not known / NA
19 / Oromia Credit and Saving Share Company1* / 2 / - / Not known / NA
Source: Field survey
The Survey Findings
The findings of each interviewed financial institutions explained as follows.
Commercial Bank of Ethiopia: Currently this bank has the inclusion of three types of Sharia-compliant products such as Murabaha, Mudaraba, Wadi-Amane and Qard-Hassan. According to the bank manager, Mudaraba Sharia-compliant product is tailored to livestock sector for traders. According to the bank customer service manager Ato Mezegabe Leema said the bank currently has not yet started loan services using other Sharia-Compliant products except profit/loss sharing (Mudaraba). This Sharia-compliant does not apply interest based loan service instead it uses profit-loss sharing system. The profit share will be decided based on the prior agreement between the bank and loan taker. Besides, the profit of loan taker business also will be based on the prior agreement between the lender and borrower. In case the loan taker loss profit from its business the bank also shares a loss with the loan taker. Murabaha (mark-up) system is the other type of Sharia-compliant that Commercial Bank of Ethiopia use to facilitate loan service. For instance the bank purchases commodity and resells it to the loan taker through adding some mark-up on acquired cost of commodity. The repayment period of the loan is one year.
Lessons or experience gained from England, Indonesia and Saudi Arabia abetted commercial bank of Ethiopia to understand the importance and how to manage Sharia-Compliant Products in the bank financial services. In order to make the bank services inclusive to all and respond customers request or demand as well as to be competent in the market are the major factors to incorporate Sharia-compliant products in its financial services.
NIB International Bank: This is private bank currently has free interest saving only. Zewida NIB International bank Jigjiga branch manager said the bank has started the process for the inclusion of Sharia-compliant products or Islamic window in their financial service. The plan has been included in the 2006 Ethiopian fiscal year i.e. July 2013 to June 2014. The manager confirmed that NIB International Bank begin providing loan services through Sharia-Compliant products within three months. As a result NIB international bank established separate department to manage Islamic window or Sharia-compliant products. However, the manager disclosed that the bank has not yet decided the types of Sharia-compliant products to include in its financial services.
According to him requests from customer especially big traders or business people and to be competent in the bank business as well as create linkage with international banks initiated the bank to adopt Sharia-Compliant products.
Awash International Bank: With the exception of free interest saving, this private bank hasn’t any Sharia-compliant products in its financial services.
Cooperative Bank of Oromia: This private bank is providing free interest saving service for its clients. However, the bank has done assessment on the profitability of Sharia-compliant products inclusion in its financial services. Jigjig branch manager said the assessment results reveal that the inclusion of Sharia-compliant products in their financial service is profitable. However According to the manager, to start the inclusion and application of Sharia-compliant products on the bases of its profitability only is difficult unless there is clear ground on financial recording system of private enterprise. This is because the application of Sharia-compliant products need regular and formal financial (business transaction) recording or accounting system. Regarding the profitability, the manager said the main source of bank business profit is from loan services. According to him, Cooperative Bank of Oromia needs to start the application of Sharia-Compliant products mainly for loan services with collateral. So when the bank facilitate loan using Sharia-Compliant products, it considers the profitability of borrower business. In case the business fails, loan taker’s collateral can be its guarantee.
The branch manager added that Oromia cooperative bank has concrete plan to begin loan facility using Sharia-compliant product like profit-loss sharing type that mainly relay on formal financial accounting system of private enterprises. Reportedly emerging of exporters like livestock traders and expansion of private investment enterprise in the region as well as presence of high loan request using Sharia-Compliant products from customers particularly Muslim customers from market-demand side and absence of lenders for big investment through Sharia-Compliant products from supply side motivated to incorporate Sharia-Compliant products in the financial services of Cooperative Bank of Oromia.
Conversely in Somali region the majority potential private enterprises dependent on informal financial accounting system which is a bottleneck to the bank to track either the profit or loss of a private enterprise. Therefore, private enterprises financial accounting system is determinant factor to Oromia Cooperative bank for the inclusion of Sharia-compliant products in its financial services in particular for the loan services.
Despite the fact that Cooperative Bank of Oromia provide zero interest loan service to its customer. This type of loan service is mainly pertinent to exporters that receive the loan in Ethiopian Birr and agree to repay the loan through equivalent USD that calculated on the basis of loan disbursed exchange rate. For example Cooperative Bank of Oromia Dire Dawa branch provided loan with zero interest to Bishanfire coffee trading company and the company repaid the loan with USD.
Wagagen Bank: It is one of the private banks providing financial services in Ethiopian Somali region. Similar to the above mentioned banks, Wagagen bank also give free interest saving service to its customers. Currently Wagagen bank Jigjig branch has done research on the demand of Sharia-compliant products. According to the branch manager, data has been collected and submitted to the main office (Addis Ababa). Ato Aserate, branch manager, said the majority of Wagagen bank Jigjig branch clients are Muslim. Thus in order to make its financial services inclusive to all, Wagagen bank has planned to include Sharia-compliant products. However the opening of Islamic window depends on the findings of the research and approval of the bank Board committee.
Bank of Abyssinia: It is one of the private banks operating in Jigjig city. With exception of free interest saving, Bank of Abyssinia currently doesn’t use any Sharia-compliant products in its financial services. However the bank presently providing loan for import-export services to its customers like livestock traders through service charge service only. The repayment period of this loan is 90 days but when there is failure to pay upon the repayment period there will be interest said Biniam-Jigjig branch manager. This is not Sharia-Compliant but it interest free services