RIFT VALLEY UNIVERSITY

DIRE DAWA CAMPAS

DEPARTMENT OF ACCOUNTING AND FINANCE

CHALLENGES AND OPPORTUNITIES OF INTEREST FREE

BANKING SERVICE EVIDENCE FROM BANK OF
ABYSSINIA DIRE DAWA IN SABIYAN
BRANCH

A RESEARCH PAPER SUBMITTED TO DEPARTMENT OF

ACCOUNTING AND FINANCE FOR THE PATIAL
FULLFILMENT OF THE BACHELOR OF ART (BA) DEGREE
IN ACCOUNTING AND FINANCE

ID

PREPARED BY:1 Mehadi Mohammed 0153/13

2 Hanifa Abdalla 0227/13
3 Lensa Abdi 0188/13

ADVISOR,TAMIRAT.T JULY,2024
. DIRE DAWA,ETHIOPIA
2
 ACKNOWLEDGEMENT

Praise to Allah, the almighty, for successful completion of this research. We are
particularly profoundly grateful to our advisor, Tamirat T, for his useful and
constructive comments without which this work would have not been completed
successfully his contribution was from proposal to the compilation of this
research paper. Thirdly we deepest grateful and indebtedness is to manager of
BA Dire dawa city in Sabiyan Branch and respondents who sacrificed their
golden time in filling our interview and questionnaire respectively Finally, we
would like þ

i
 TABLE OF CONTENTS
Contents pages
ACKNOWLEDGEMENT.....................................................................................i

TABLE OF CONTENTS.....................................................................................ii

LIST OF TABLE.................................................................................................iv

ACRONYMS.......................................................................................................vi

ABSTRACT.........................................................................................................vii

CHAPTER ONE...................................................................................................1

1.INTRODUCTION.............................................................................................1

1.1 Back Ground of the Study............................................................................1

1.2 Statement of the Problem.............................................................................2

1.4 Objective of the Study..................................................................................3

1.4.1 General objective.................................................................................3

1.4.2 Specific objectives.................................................................................3

1.5 Significance of the Study.............................................................................4

1.6 Scopes of the Study......................................................................................4

1.7 Limitation of the Study................................................................................4

1.8 Organization of the Paper.............................................................................5

CHAPTER TWO..................................................................................................6

2.LITERATURE REVIEW..................................................................................6

ii
 2.1. An Over View of Interest Free Banking.....................................................6

2.2. Concept and Definition of Interest Free Banking.......................................6

2.3. Interest (Riba)..............................................................................................7

2.4. Prohibition of Interest.................................................................................7

2.5. The Fundamental of Interest Free Banking and Finance............................7

2.6. Challenges faced by Interest free banking..................................................8

2.7. Interest Rate................................................................................................8

2.8. Role of Interest Rate in Financial System...................................................8

2.8.1. Concentrated Banking: Limited Risk Management Functionality.......9

2.8.2 Motivates Saving Habits........................................................................9

2.8.3 Helps for Investment Decision...............................................................9

2.8.4 Legal and Regulatory Challenges..........................................................9

2.9 Opportunity of Interest Free Banking..........................................................9

2.9.1. Opportunities of Interest Free Banking in Ethiopia............................10

2.10. Empirical Review....................................................................................11

2.11. Summary and Gap in the Existing Literature..........................................12

CHAPTER THREE............................................................................................13

3. RESEARCH METHODOLOGIES...........................................................13

3.1 Research Design...................................................................................13

3.2 Research Approach...............................................................................13

3.3 Sours and Types of Data......................................................................13

3.4 Method of Data Collation.....................................................................13

3.5 Target Population and Sampling Technique........................................13

3.6 Method of Data Analysis......................................................................14

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CHAPTER FOUR.........................................................................................15

4. Data Presentation and Analysis.................................................................15

4.1 Respondents Profile..............................................................................15

4.3 General Awareness of IFB...................................................................18

4.4 Challenge of Interest Free Banking Service.........................................20

4.5. Opportunities of interest free banking service....................................21

CHPTER FIVE..............................................................................................26

5. CONCLUSION AND RECOMMENDATION........................................26

5.1 Conclusion............................................................................................26

5.2 Recommendations................................................................................27

REFERENCES................................................................................................1

APPENEXES...................................................................................................3

iv
 LIST OF TABLE
Table 4.1”: Shows the sample Respondents background information

Table 4.2 shows whether customers are currently using banking service or not,
reason for choosing BA and reason for using IFB.

Table 4.3.1 Interest free banking is launched for only Muslims.

Table 4.3.2 the reason why many people were not using banking service was
due to the banking service was operating with interest

Table 4.3., IFB gives priority to Muslim community.

Table 4.4.1 Misunderstanding and lack of awareness about interest free banking

Table 4.4.2 Lack of qualified personnel and competent Sharia advisor is

another challenge of interest free banking.

Table 4.4.3 Attitude of people regarding IFB.

Table 4.5.1 IFB will improve the tendency for business expansion and
investment.

Table 4.5.2 Interest free banking is flexible and easy to adopt the financial
system

Table 4.5.3 Interest free banking service motivates the society for saving and
investment.

Table 4.5.4 Bank of Abysinia is engaging in interest free banking service that
address both the Muslims and non-Muslim community need

Table 4.5.6 Interest free banking is one means of resource mobilization in

banking industry.

Table 4.5.7 Customers are satisfied with interest free banking service.

Table 4.5.8 there is high demand for interest free banking

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 ACRONYMS

AAOIFI- Accounting Auditing Organization for Islamic Financial Institution

BA- Bank of Abyssinia

CSA- Central Statistical Agency

IAS- International Accounting Standard

IFB- Interest Free Banking

IMF- International Monetary Fund

NICD- Negotiable Islamic Certificate of Deposit

vi
 ABSTRACT

The main objective of the paper was to examine the opportunities and
challenges of establishing interest free banking in Ethiopia particularly in Dire
Dawa city. For this study, both qualitative and quantitative research approaches
were used. And the data collected from primary data types which are
questionnaires and personal interview. The researcher used non probability
purposive sampling for employees and convenience sampling for customers of
Bank of Abyssinia Dire Dawa city in Sabiyan branch and descriptive analysis
like table, frequency and percentage to draw conclusions and inferences.
Finally, the following recommendations were for warded from the finding:- it is
better to create awareness by customers to employees if interest free banking
service is to be developed, it is advisable to aggressively promote about IFB,
training and capacity building is recommendable to employees of Bank of
Abyssinia Dire Dawa city in Sabiyan Branch in order to enhance customer
satisfaction and attraction.

vii
 CHAPTER ONE INTRODUCTION

1.1 Back Ground of the Study

Interest free banking is a banking system that compliance with Islamic Law –
Sharia. The rules and practices under Interest free banking are in accordance
with the primary sources of Sharia Law. The growth of Interest Free Banking
partly reflects demand from Muslim population and non-Muslim clients for
Interest free deposit facilities and fund management services which involve
sharia compliance. At the same time Islamic financing methods are viewed as a
challenge on the operation by Abyssinian bankers, many of whom have sought
to get involved in this growing industry. In client driven societies there is will
ingress by those in financial services to listen and learn from the experiences of
Islamic banks, which in the longer run may bring a major breakthrough for
Islamic banking at the retail level in the country (Usmani, T 2005).

Interest free banking has grown rapidly over the past decade, and its banking
segment has become systemically important in a dozen countries in a wide
range of regions. 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 Sharia compliant financial
products (IMF, 2015).

Interest free banking offer opportunities for flow of cross border capital,
financial market Deepening, financial inclusion in both Muslim minority and
majority countries, enhancing Product offering, promotion of monetary policy
effectiveness, employment opportunities, etc. and there are also a lot of
challenges on the IFB services, there is a serious short age of scholars and
qualified managers. Unfortunately, the managers are not well trained in the use
of Islamic financial practices Islamic banking is facing the problem of legal

1
system because Islamic banking not yet proper regulated due to this there is
possibility to create tension between Islamic banking and regulators (Karbhari,
Naser and Shahin, 2004).

1.2 Statement of the Problem

Interest free banking faces significant challenges as a result of having its own
Sharia experts and well trained man power, on the one hand, and operating in a
tax, legal and regulatory environment that was originally designed for
conventional banks, on the other hand (Karbhari, Naser and Shahin, 2004).

The economic reason derived from savers of principles providing inspiration to

device an interest free financial system has been substantiated in the way that
interest concentrates wealth in the hands of few. Thus interest free banking
emergence predicts positive contribution to both religious as well as economic
factors (Taqi and Karachi, 1996).

According to (IMF, 2015). Interest free banking (IFB) has potential to

contribute in at least three dimensions. First it promises to foster financial
inclusion especially of large underserved Muslim population. Second, its
emphasis on asset baked financing and risk sharing feature implies that it could
provide support for small and medium sized enterprises (SME) as well as
investment in public infrastructure. Finally, its risk sharing feature and
prohibition of speculation suggests that Islamic finance may in principle posse
less systemic risk than conventional finance. However, for this potential to be
realized and to be allowed this industry to develop in safe and sound manner, a
number of challenges need to be addressed.

2
Numerous researches on “challenges and opportunity of interest free banking”
in developed and emerging market. However due to its novelty to Ethiopia, the
concept is not yet well studied. Among these researches, (Mohammed, 2012).
Has studied on “The challenges & opportunities of Islamic banking in Ethiopia.
In his work the potential challenges as: - lack of awareness, regulation,
supervisory and institutional challenge & Lack of support. Gap in research and
development in Islamic studies lack of qualified human resource as well as
wrongful association with specific and global issue. But the study conducted
before practical introduction of interest free banking in Ethiopia.

(Akmel, 2015). Studied on “challenges and prospects of Islamic banking on

resource mobilization in Ethiopian commercial banks” the study focuses on
challenges and opportunities of Islamic banking only on resource mobilization
other challenges and opportunities were not well addressed.

(Kerima, 2016). Studied on “challenges on Interest Free Banking Service” the

study discuses only the challenges faced by the service and users of IFB
products and services scope provided by Ethiopian banking through IFB
including whether there is unmet demand of users, awareness of customers and
capacity of banks. But the study did not address the opportunity of IFB as a new
business strategy in Ethiopia.

(Tsion, 2017). Addis Ababa University has studied on “challenges and

opportunities of interest free banking” on selected five Bank of Abyssinia
which are in Addis Ababa. But this thesis is broad and its finding was mainly
focus on challenge and opportunities only.

Therefore, since the idea and application of interest free banking is new for
economy, new for the society, new for the society and even for the business
practitioners its users are still lower than its capacity and some people are
wrongly understanding its concept (they think as if its users are only Muslims),
advantage and operation. So this study will attempt to use the recent data,

3
increase the number of people from various segments of the society in order to
access the needs, challenges and opportunities of interest free banking in
Ethiopia particularly in Dire Dawa city.

1.3 Research Questions

1. Is there right awareness/ perception about interest free banking service?

2. Does the establishment of this service motivate the society for saving and
investment?

3. What are the basic challenges that the bank faced by starting interest free
banking service?

4. What are opportunity interest free banking service for the society around Dire
Dawa city?

1.4 Objective of the Study

1.4.1 General objective
The main objective of the paper is to examine the opportunities and challenges
of interest free banking in Ethiopia particularly in Dire Dawa city.

1.4.2 Specific objectives

The specific objectives of this study mainly were: -

1- To understand the perception/awareness about interest free banking service.

2- To understand the contribution of interest free banking in areas of investment

and saving.

3- To identify the challenges encountered by Abyssinia Bank when starting

interest free banking.

4- To identify the opportunity interest free banking system for the society
around Dire Dawa city.

4
 1.5 Significance of the Study
The researcher would be benefited from the study for partial fulfillment of BA
degree in Accounting and Finance and also would get experience, skill and
knowledge for conducting another research in the future. Firstly, this study
might be relevant to business organizations and individuals to high light about
the need for establishment of interest free banking especially to those who does
not involve in interest charged banking system. It may also give general
understanding about interest free banking to successfully achieving its goal.
This study might serve as a reference for future researcher on the same topic. In
addition to the above, the results found from the study could be one input for
banks that are interested to involve in interest free banking system.

1.6 Scopes of the Study

This study was conducted in Dire Dawa city. In part paper experience of
challenge and opportunity of interest free banking along with other issue are
included. This research focused on the challenge and opportunity of interest free
bank of Abyssinia Bank Dire Dawa city in Sabiyan Branch.

1.7 Limitation of the Study

The researcher faced problems of availability of sufficient data. In addition to
this, problem of corporation from concerned group of people. A major limiting
factor of the study was lack of sufficient data and failure of respondents to
return questionnaires were not returned due to respondents’ carelessness.

1. 8 Organization of the Paper

This paper is organized in to Three Chapters. Chapter one contain general

introduction, statement of problem, objective of the study, research question,
significance of the study, organization of paper, scope and limitation of the
study. Chapter two Reviews of related literature collected from different

5
sources. Chapter three embraces description of the study area, source and types
of data, method of data collection, target population and sampling method,
method of data analysis.

CHAPTER TWO

2.LITERATURE REVIEW

2.1. An Over View of Interest Free Banking

Over the last forty years, there has been a rapid expansion of financial
institution that can be characterized as interest free banking in that they do not
deal in reset transaction. Interest free banking, the more general terms, is
expected not to avoid transaction based on interest but also to participate
activity in achieving the goals and objectives of financial system (brown, 2005).

2.2. Concept and Definition of Interest Free Banking

Many scholars give various meaning to the term interest free banking it refers to
a system of banking or banking activity that is consistent with the principles of
the sharia (Islamic ruling) and its practical application through the development
of Islamic economics. The principles which emphasize moral and ethical value
in all dealing have wide universal appeal. Sharia prohibits the payment and
acceptance of interest charge for lending and accepting of money as well as
carrying out trade and other activities that provide goods and services
considered contrary to its principle. While these principles were used as the
basis of flourishing economy in earlier time, it is only in late 20 th century that
number of interest free banks were formed to provide an alternative basis to
Muslims through Islamic banking is not restricted to Muslims (www.islamic-
banking.com)

6
According to (Abdurrahman, 2011). Islamic banking is defined as conventional
banking minus the word “interest” with a new contract that does not include the
word interest and that is structured in convoluted version of buy/sell in which
the seller changes ownership to the bank and then bank sells it to the eventual
buyer. Many participants in Islamic banking business through with good
intention that these guidelines made the contract Islamic. Islamic banking
consists of mobilizing funds through noninterest bearing deposit and through
investment based on profit sharing and loss bearing contract and channeling
these funds to finance permissible (under sharia) investment activity using
various forms of Islamic finance contract.

Islamic banking is a brand of banking that is socially responsible and is

community based in both spirit and intent. This brand of banking is
manifestation of Judeo-Christian-Islamic value, in addition to this Islamic
banking does not discriminate, because discrimination in service and financing
and in dealing with others is a major sin in all Abraham faiths (Abdurrahman,
2011).

Islamic banking is a system of banking that mobilizes saving on the basis of

profit and loss sharing that is considered to be fairer and more conducive to
measurement and development. Owing to the growing demand by the Muslim
population in western countries and also to the increasing interest of Islamic
investors to diversify geographically their portfolios, conventional banks are
increasingly becoming interested in entering the market of Islamic financial
products (Hessen and Lewis, 2007).

2.3. Interest (Riba)

Interest is component in banking concept. Interest is one of the most effective

factors for deciding to deposit in banking system (Mohammed & Mahdi, 2010).

7
Interest as one the determining factor for Abyssinia bank deposit and it is
important element of Islamic economic society. All covers the meaning to load
additional money on funds lent to borrower. As such it is fundamental to
understand the Islamic economics to have fair idea about Islamic banking
(Herald and Haiku, 2009).

2.4. Prohibition of Interest

Prohibition of interest is any unjustifiable increase of capital whether in loan or

sale it is the central taint of the system. More precisely any positive fixed
predetermined rate tied to the maturity and the amount of principal that is
guaranteed regardless of performance of the investment is considered interest
and it is prohibited (Iqbal and Mirkahor, 2011).

2.5. The Fundamental of Interest Free Banking and Finance

Islamic commercial law is actually based on four basic principles. The

fundamental of first

Islamic business principle is profit and loss sharing and the second is based on
fixed service

Fees and charges and third is based on free of cost and no charges. The other
principles are changing with the situation of the business and its operation
(Bellalah and Ellouz, 2004).

2.6. Challenges faced by Interest free banking

Interest free banking is in infant stage in Ethiopia economy and some of the
potential challenges should be taken up to make Islamic banking more
productive in every segment of the economy and society. There is need to make
a clear and transparent system of general Islamic banking which concerned to

8
all sectors of society and economy in order to address the challenges and threats
of the future needs of the financial sector. Islamic banking has been facing so
many challenges since its origin. Islamic banking has been in transition and
development phase in different countries for the last two decades. Islamic
banking industries have always suffered with the issue of different opinions of
Islamic scholars, suppose a product or practice may be accepted to one Scholar,
could be considered un-Islamic by another scholar (Khalaf, 2007).

2.7. Interest Rate

Investor can earn interest by lending currency. Interest parity suggests that the
rate at which currency “A” can be exchanged by currency “B” related to the rate
established today that can be earned in the counties A and B. It applies a
currency trade that occurs in the future (Harvey, 2012). The spot rate is the rate
at which currency is exchanged today (By Linda Brewton, Eshowe contributor).
Forward rate is the rate established today that applies to a currency trade that
will in the future.

2.8. Role of Interest Rate in Financial System

The financial system has a number of key functions which help to facilitate this
shift in money that are important for sustainable developments and Economic
development is partially dependent on the financial system to help mediate the
transfer of money to areas of the economy that need most (Wilson, 1986).

2.8.1. Concentrated Banking: Limited Risk Management Functionality

IFB face another crucial challenge in improving risk management strategies and
corporate Governance because of them adhere to Sharia’ a principle. They are
currently exposed to all types of risk including those faced by conventional
banks and those unique to IFBs. The assets and liability structures of IFB have
unique risk characteristics as a result of the Islamic banking model evolving into

9
pure Islamic modes and instruments as previously discussed (Ikha and
Abdullah, 2011).

2.8.2 Motivates Saving Habits

The financial system allows placing your excesses money in to saving account
in bank of your choice. Keeping your money safe guards your saving, and the
bank pays you interest based on the amount you keep in your account.

2.8.3 Helps for Investment Decision

Financial system also facilitates transfer of money from investors to business

when business; raise capital, the sale of stocks to investors. Investors give their
money to the company in exchange ownership in the company (brown, 2005).

2.8.4 Legal and Regulatory Challenges

Islamic banking is still highly promising as compared with conventional

banking, and this is an immense factor contributing to the range of challenges
IFB are currently facing; due to the novelty of Islamic banking systems, their
legal and regulatory frameworks are still quite complex and un standardized.
Therefore, they tend to follow varied accounting and other practices with no
universally recognized standards. Some of them follow International
Accounting Standards (IAS), others adhere to standards issued by Accounting
Auditing Organization for Islamic Financial Institutions (AAOIFI), while some
adopt accounting standards prevalent in their local markets (Khalid and Amjad,
2012).

2.9 Opportunity of Interest Free Banking

Interestingly, financial market analysts from all extractions and across religious
divide are gradually familiarizing with these concepts and terminologies. At the
global scene, global Performance indicators have been developed for tracking

10
the performance of Islamic financial services/products. In the preceding
paragraph, IFI’s are said to be capable of wooing the non-bank public to accept
banking services that are compatible with their religious beliefs and way of life.
Once this is achieved, it offers great opportunity for the apex bank to have a full
grip of monetary Policy variables; monetary policy rate, money supply and
credit availability. On the contrary, For instance, high degree of financial
exclusion results in high proportion of money outside the bank and equally
outside full control of the Central Bank. Last but not the least is the fact that the
presence of IFB offers opportunities for employment to practitioners in the
banking Industry and to new entrants as well (Aliyu, 2012).

2.9.1. Opportunities of Interest Free Banking in Ethiopia

The prospect of Islamic Banking looks very bright. Ethiopian Muslims and non-
Muslim Community everywhere want Interest Free Banking. In addition,
Ethiopia having more than 35 Million Muslims offers huge opportunities to
exploit. The size of the market will be very large as majority of Ethiopian
Muslims, in the name of religious faith, are looking for interest free financial
services. It is pertinent to mention here that Islamic banking is not meant for
Muslims only but non-Muslims may also avail the benefit of it. And it is
feasible to have a Parallel banking system: one based on Sharia along with a
conventional one. The growth and Transformation Plan, third five-year
economic plan, envisages inclusive growth with development in all sectors of
the economy. Islamic banking is an effective Mechanism to subjugate the
liquidity and inflation problems while allowing inclusive growth. For real
inclusive growth, which requires increase in income and employment should be
ensured for all segments of the society. If Islamic banking is introduced, the
inadequate labor capital ratio, for informal sector workers and farmers
associated with agriculture and manufacturing industries could be resolved
through equity finance, which might be a revolution in our agriculture and

11
unorganized sector. With improved labor capital ratio, our vulnerable workers
associated with agriculture and Unorganized sector might be able to compete
effectively with the formal sector workers. Thus Islamic Banking may
financially empower majority of Ethiopian workers and farmers. Moreover,
with introduction of Islamic banking, Ethiopian government will certainly gain
Diplomatic advantages to make financial dealings with Muslim dominated
nations specially to attract trillion dollars of equity finance from the gulf
countries. Finally, Islamic banking should not be regarded as religion based
banking business, but could be profitably used to resolve issues pertaining to
economy (Muhumed, 2012).

2.10. Empirical Review

There are many studies undertaken relating to challenges and opportunities of

interest free banking. The Islamic finance and banking literature shows that
many scholars have tackled the subject matter of the Islamic finance challenges
and opportunities (Wilson, 2000). Examines the growth of Islamic finance in
United Kingdom. He supposed that The Islamic finance partly reflects demand
from Muslim resident and non-resident clients for Islamic deposit facilities and
fund management services which involve sharia compliance. The study is
focused on the Islamic financing methods as a challenge and opportunity by
Western bankers. The results of the study indicate that there are many
challenges and opportunities faced by Islamic Banks in United Kingdom to
increase their economic growth

(AlMaraj, 2008). “Governor of the Central Bank of Bahrain discusses the need
for Islamic banks to diversify activities, and he could identify the challenges
that faces Islamic Finance as that investment banks are project-driven and do
not have a steady source of revenue to tide them over any slumps in economic
activity, the multiplicity of Sharia’s boards and judgments, sharia compliance

12
and how to provide a satisfactory framework to assure investors and other
stakeholders, accounting standards.

(Sungrad, 2008). Discusses the Islamic Banking and Finance growth and
challenges ahead. It provides a long list of challenges such as competition,
Demand for more expertise on Islamic Finance, the immediate need for short-
term money market investments and tools for liquidity Management, Limited
Islamic secondary markets, and various Sharia'h interpretations, Small Number
of participants and Slow or stagnant development of Islamic financial
instruments. (Zainordin, 2016). Conducts a questionnaire to investigate the
challenges facing the Development of Islamic banking in Kenya. His findings
consider the Legal Support as most Challenge as Islamic law offers its own
framework for execution of commercial and financial Contracts and
transactions.

(Iqbal, Ahmad and Khan, 2009). Supported that legal challenges affected the
development of Islamic banking and financial institutions as Islamic banking is
lack of effective supervisory Framework. It caused the prevailing system
inefficiency and hence it deserves a serious attention.

(Heidi and Malik, 2006). Supported the statement of “Misunderstanding of

Islamic Financial Concept.” They stated that the first impression of Islamic
banking is the fixed rate concept of a “halal” loan serves as the substitution for
conventional loan.

(Karbhari, Nasir and Shahin, 2004). Claimed that the difference Islamic cultures
and societies within different country causing the interpretation of Shariah
principles go inconsistent among each of the Muslim schools. The inconformity
towards the Shariah views and different methodologies make the concept of
Islamic financial institutions become unclear.

13
The study of (Wiley and Sons, 2011). Proved this challenge. He found that
Islamic financial intermediaries expose themselves to liquidity problem due to
the lack of developed money market and the shortage of short term investment
securities such as treasury bills and marketable securities which offer limited
capital risk with optimum returns.

Not only this (Archer and Karim, 2006). Also proved that the development of
Islamic Financial Institutions is challenging due to the incompleteness of
traditional financial instruments which applied to the Shariah Law. Unlike
conventional banks, Islamic banks are prohibited to issue treasury securities to
maintain liquidity. There are still no other corresponded alternatives to
substitute treasury securities to carry out the liquidity function. The discussion
of Islamic banking and finance has a long history in the world but it is not the
same in Ethiopia because the phenomenon of Islamic banking and finance is a
new concept. And there have been very few studies conducted regarding
operational challenges of interest free banking and its opportunities

2.11. Summary and Gap in the Existing Literature

It becomes especially worthwhile to examine challenges and opportunities of

interest free banking in Ethiopia since different outcomes are expected to
conclude in Dire Dawa city. Although various survey studies have been
conducted to assess the challenges and opportunities of interest free banking,
most of the studies have been carried out on the overall opportunities and
challenges and its competitiveness with that of conventional banks. Even
though IFB seems to be familiar and highly demanded, there is a dearth of
empirical study that examines the challenges and its opportunities in Ethiopia
particularly. Therefore, this study makes an attempt to bridge this gap and
elaborated the challenges and opportunity of IFB IN Ethiopia.

14
 CHAPTER THREE

3. RESEARCH METHODOLOGIES
3.1 Research Design

In order to achieve the main objective of the study descriptive research design
was used to gather information. Because according to (Gharry and Gironhaug,
2005). Descriptive research design is used when there is awareness about the
problem under studied?

3.2 Research Approach

The researcher was used both quantitative and qualitative research approach,
because quantitative research approach helps to the researcher to use statistical
methods of measurement in order to analyze and interpret what would be found
through the research to interpret ideas gathered through interview and structured
questionnaire and qualitative research approach help to the interpret data that
would be found structure interview.

3.3 Sours and Types of Data

Source of data selection to conduct the study is important because the more
valid information source, the reliable could be the information.in conducting
this research, both primary and secondary data was used. The source of primary
data would be from employee and customers of Abyssinia Bank by using
structured questionnaire and structured personal interviews. While, secondary
data is collected from written by various authors.

15
 3.4 Method of Data Collection

For this study the data was collected from both primary and secondary data
types. The primary data collection method includes questionnaires, personal
interviews. On the other hand, secondary data collection methods include:
books, internet materials, published materials was used.

3.5 Target Population and Sampling Technique

The researcher would be collected data from customers (who have direct
contact with interest free banking service) and employees including manager,
assistant manager and other employees who are engaging in providing interest
free banking service to the customers of Bank of Abyssinia, Sabiyan branch.
There are totally 27 employee and 504 interest free banking customer in the
Bank of Abyssinia in out of 27 employee 6 were professional and the other
remaining was involves in different takes, researcher would be agree to used
census or total professional employee of the Bank of Abyssinia Dire Dawa in
Sabiyan branch, because it was appropriated, sufficient and realizable
information from censures and from 504 customer are engaged in interest free
banking department , so sampling would be applied to select as a sample from
total customer of interest free banking Dire Dawa in Sabiyan branch .The
researcher selected 83 of customer by using the formula:

n= Z2 p*q*N ( by Kothar; 2004)

(N-1) e2 + Z2 p*q

n= 1.642 0.5*0.5*504 (by Kothar; 2004)

(504-1)0.12 + 1.642 0.5.0.5
n=83

Where; n: Sample size

16
 N: Total population
Z: The critical value at 90% confidence (1.64)
e: the error term (precision)
p: Population proportion (which is 0.5) to take large sample size
q: 1-p

3.6 Method of Data Analysis

The researcher would be used descriptive method of data analysis including the
group of the target population according to their profession such as customers
and employees. The descriptive type of analysis could be described the data by
using percentage and frequency counts would be used to analyze and interpret
the data collected from sample respondents.

CHAPTER FOUR

4. Data Presentation and Analysis

This chapter deals with the data presentation, interpretation and analysis of the
study. This section has two parts. The first is background of the respondents and
the second part deals with the major components on challenges and
opportunities of interest free banking service.
To achieve the main objective of the research a total of 83 questionnaires were
prepared and distributed to customers and employees (as service users not as

17
service providers) of the bank. Out of these 42 (50.6%) of them were properly
filled and collected. Therefore, I used only 42 respondents for further analysis.

4.1 Respondents Profile

Table 4.1”: Shows the sample Respondents background
information
Variables Category Frequency Percentage (%)

Sex Male 30 71.4%

Female 12 28.6%

Total 42 100%

Age 20-30 11 26%

31-40 20 48%

41-50 11 26%

Over 50 0 0%

Total 42 100%

Religion Muslim 35 83%

Non-Muslim 7 17%

Total 42 100%

Uneducated 6 14%

Certificate 0 0%
Education
level Diploma 10 24%

10-12 8 19%

First Degree 15 36%

18
 Masters And 3 7%
Above

Total 42 100%

As table 4.1 indicates from the total sample of 42 respondents 30(71%) were
males and the remaining 12(29%) were females. As clearly understand from the
sample respondents, the major users of interest free banking service are males.
Table (4.1) also show the age character tics of the respondent customers. As the
table indicates majorities of customers (48%) are belonging at age of 31-40 age
category. The table also indicates the religion of the respondents. From a sample
of 42 respondents, 35(83%) of them were Muslims and only 7(17%) were non-
Muslims. This indicates that the majority of the interest free banking service
users are Muslim community and the lower number of non-Muslim users of
interest free banking service may be due to lack of awareness and wrongful
association with religion since many people think as if interest free banking is
for only Muslims.
The educational background of the sample respondents is also indicated by the
table. As the table indicates, 15 respondents (36%) out of 42 sample are first
degree holders and 6 respondents (14%) have not any formal education and only
3 respondents have masters and above degree.
Therefore, from the table we can conclude that major customers of BA interest
free banking user are well educated and are assumed to have good awareness
about IFB and IFB service. 4.2 General Analysis
This section deals with the analysis and interpretation of data obtained from the
response collected from distributed questionnaire. It also presents and analyzed
the data obtained through interview with the manager of the bank.

19
 Table 4.2 shows whether customers are currently using banking
service or not, reason for choosing BA and reason for using IFB.
Item Questions Respondents

1 Currently do you use bank services? Frequency Percentage

Yes 42 100%

No 0 0%

Total 42 100%

2 Based on your judgment why do you choose BA?

Location Accessibility 29 69%

Variety of number of service including IFB 10 24%

Absence of options 0 0%

Other reason 3 7%

Total 42 100%

3 Why do you choose using interest free banking

than conventional banking?

The prohibition of interest in Holly Qur’an 33 78%

Prohibition of interest in Holly Bible 7 17%

Less riskier than conventional banks 0 0%

Because it has a role in economic development 0 0%

Other reason 2 5%

Total 42 100%

20
From the table 4.2 above item number 1, respondents were asked whether
currently they are using banking service or not. This question is asked because
sometimes customers may be the former customer for a given bank and became
the current customers of another bank and use previously deposited balance at
that bank only rather than currently mobilizing in it. And from the respondents
we get that 100% are using banking service currently.
In item no 2 of table 4.2, customers were asked the reason why they choose
BA for saving and deposit mobilization. And around 69% of them were using
Bank of Abyssinia due to location accessibility. As many respondents reply,
BA, among others have one unique feature that is availability of service in every
town or city since it is public, it is easy to launch BA branch in every towns and
cities. That is why many customers choose it by location accessibility.
The table 4.2 above in item number 3 also clearly shows the reason sample
respondents are using interest free banking than conventional banking. For this
question, 33(78%) respondents were replied that due to the fact that interest is
prohibited in holy Quran, 7(17%) respondents replied that due to the prohibition
of interest in holly Bible and the remaining 2 respondents are using IFB for
other reasons which are not mentioned here. As the respondents reply indicates
from the table above (other things remain constant) many people are not using
conventional bank since it involves interest, which is not allowed in religions
because ,95% of the sample respondents reply due to the prohibition of IFB in
their holy books.

4.3 General Awareness of IFB

Awareness and understanding of the system is crucial factor in studding the
challenges and opportunities.

Table 4.3.1 Interest free banking is launched for only Muslims.

Item Response Frequency Percentage

Strongly agree 8 19%

21
 Agree 7 17%

Interest free Neutral 3 7%

banking is launched
Disagree 10 24%
for only Muslims.
Strongly 14 33%
disagree

Total 42 100%

From the table we understand that 14 (33%) of the respondents strongly

disagree with statement that interest free banking is launched only for Muslims
and 10 (24%) respondents were disagree. This shows that most respondents
(>50%) from the sample have more awareness about the service. From the
respondent’s response, we can understand that, even more than 50% of the
respondents disagree with the statement, the remaining 8(19%) and 7(17%)
respondents replied that they strongly agree and agree respectively. This shows
that there is still the problem of awareness and misconception regarding interest
free banking service because actually IFB is not launched for only Muslims
rather its target was to give banking service for those who want not to contact
themselves with interest. But Muslims are the larger users in number.

Table 4.3.2 the reason why many people were not using banking
service was due to the banking service was operating with interest
Item Response Frequenc Percentage
y

The reason why many Strongly 5 12%

people were not using banking agree
service for saving was due to
Agree 7 16%

22
the fact that the banking
service was operating with Neutral 0 0%
interest.
Disagree 20 48%

Strongly 10 24%
Disagree

42 100%

As we can understand from the table above, 20 respondents (48%) strongly

disagree from the statement. This implies that not only the involvement of
interest was determining factor there was another reason in addition to interest
that made many people not to mobilize their money in the bank before the
introduction of IFB this may be lack income, higher consumption, lower saving
habit and other reason. Also out of 42 respondents 10(24%) respondents
disagree with the statement above this also shows that the respondents have
awareness about the banking service in this particular issue.

Table 4.3., IFB gives priority to Muslim community.

Item Response Freque Percenta
ncy ge

Strongly agree 5 12%

Even if interest free banking is Agree 10 24%

providing service for Non -Muslims, It Neutral 7 16%

gives priority to Muslim community.
Disagree 8 19%

Strongly 12 29%
Disagree

23
 Total 42 100%

The table indicates that even 10(24%) and 5(12%) respondents are agree and
strongly agree respectively that the IFB service give priority to Muslim, most
respondents i.e. 20(48%) have right awareness about interest free banking
service because they show their argument by disagree that interest free banking
service gives priority to Muslim community. Only 7 out of 42 respondents are
neutral to give their response. And only 5 respondents (12%) strongly agree on
the same issue this is the indication of lack of awareness about interest free
banking service these customers or respondents think as if the service is
established for only Muslims but it is misconception. Since interest free banking
is providing banking service for both Muslims and Non-Muslims it does not
give priority to Muslims rather it threats its customers equally in delivering
service. So the bank should give awareness about their service to those
customers and other customers.

4.4 Challenge of Interest Free Banking Service

Table 4.4.1 Misunderstanding and lack of awareness about interest
free banking.

Statement Response Freque Percentag

ncy e

Strongly 12 29%
agree
There is misunderstanding and
Agree 11 26%
lack of awareness about interest free
banking Neutral 2 5%

Disagree 9 21%

24
 Strongly 8 19%
disagree

Total 42 100%

The table shows that 12 (29%) and 11 (26%) respondents are strongly agree and
agree respectively on that interest free banking is facing misunderstanding and
awareness problems. As the manager of the bank also replied through interview,
there is higher level of misunderstanding and awareness problem from their
customers. This indicates that the bank is facing challenge by its customers this
may leads to the loss of many potential customers unless it (the bank) create
awareness. Even if out of 42 sample respondents ,9(21%) and 8(19%)
respondents disagree and strongly disagree respectively, their disagreement
does not show that the service is not facing the challenge of misunderstanding
and awareness problem because in addition to larger number of respondents, the
manager have replied the existence of the problem.

Table 4.4.2 Lack of qualified personnel and competent Sharia

advisor is another challenge of interest free banking.
Statement Response Frequency Percentage

Strongly agree 22 52%

Lack of qualified personnel
Agree 10 24%
and competent Sharia advisor is
another challenge of interest Neutral 3 7%

free banking. Disagree 5 12%

Strongly 2 5%
disagree

25
 Total 42 100%

As we are clearly understanding from the table 4.4.2, 22(52%) respondents have
supported the statement that IFB lack qualified personnel and competent sharia
advisor and 10(24%) respondents reply strongly agree and agree respectively on
other hand,7%, 12% and5% respondents were given their response, neutral,
disagree and strongly disagree respectively. In addition to the sample
respondents’ response, the manager also replied the existence of lack of
qualified personnel who is able to do as per the sharia principle of Muslims.
Lack of qualified and competence advisor have negative effect for the
development of the service by reducing its potential and existing customers.

Table 4.4.3 Attitude of people regarding IFB.

Statement Response Frequency Percenta
ge

Strongly agree 25 60%

There is negative attitude
Agree 9 21%
of people regarding IFB
(wrong association with Neutral 5 12%

religion) Disagree 3 7%

Strongly disagree 0 0%

Total 42 100%

As the respondents’ response indicates from the table above 25(60%)

respondents from 42 strongly agree that there is negative attitude regarding IFB
or there is wrong association with religion by customers9 (21%),5(12%) and
3(7%) respondents were agree, neutral and disagree respectively. So since the
larger number of sample respondents support that IFB is facing attitude

26
problem, the researcher also suggests IFB to teach the society in order not to
loss specially its potential customers

4.5. Opportunities of interest free banking service.

Interest free banking has a positive opportunity in addition to the above
problems or challenges

Table 4.5.1 IFB will improve the tendency for business expansion
and investment.
Statement Response Frequenc Percent
y age

Strongly agree 14 33%

The offering of interest free
Agree 11 26%
banking products (Saving and Loan
Service) will improve the tendency Neutral 3 7%
for business expansion and
Disagree 7 17%
investment.
Strongly 7 17%
disagree

Total 42 100%

As we can understand form table, 14(33%) respondents strongly believe that

interest free banking will improve business expansion and investment and
11(26%) respondents agree with the statement. From the remaining 17
respondents, only 3(7%) were not give their agreement or disagreement
(neutral) and finally, 7 respondents (17%) and again 7(17%) equally disagree
and strongly disagree with the statement. This argument may be either they did
not aware about IFB or may not find that IFB will contribute for investment and

27
business expansion. In general, from the table above we can conclude that IFB
have a positive contribution in areas of investment and business expansion
because more than 50% of respondents show their support by replying strong
agreement and agreement. In addition, the manager replied through interview,
the positive contribution of starting interest free banking is that IFB expands
their deposit from customers and investing that deposit in available investment
options. As a result, business expansion is increase.

Table 4.5.2 Interest free banking is flexible and easy to adopt the
financial system
Statement Response Frequen Percentage
cy

Strongly agree 10 24%

Interest free banking is
Agree 17 40%
flexible and easy to adopt the
financial system. Neutral 4 10%

Disagree 6 14%

Strongly 5 12%
disagree

Total 42 100%

From the total respondents, 17(40%) and 10(24%) believed that IFB is flexible
and easy to adopt the financial system by replying their agreement and strong
agreement respectively. and 4(10%) on other hand, 6(14%) and 5 (12%)
respondents were disagreed and strongly disagreed. Since the larger number of
respondents are supporting the statement above, there is a tendency of flexibility
to financial system in terms of technological infrastructure.

28
 Table 4.5.3 Interest free banking service motivates the society for
saving and investment.
Statement Response Frequency Percentag
e

Interest free banking service Strongly agree 21 50%

motivates the society for saving
Agree 19 45%
and investment in Dire dawa
city Neutral 2 5%

Disagree 0 0%

Strongly disagree 0 0%

Total 42 100%

Amazingly 21(50%) and 19(45%) respondents are strongly agree and agree
respectively with the statement above. Almost 95 %( 50% strongly agree +45%
agree) respondents are agreed on that IFB motivates the society in Dire Dawa
city for saving and investment. As we clearly understand from the table above,
interest free banking is playing a vital role in expanding saving and investment
around Dire Dawa city. On this issue there was managers’ response according
to the manager of the bank, starting interest free banking service has improved
saving and investment. This is a good opportunity for the future of interest free
banking.
Table 4.5.4 Bank of Abyssinia is engaging in interest free banking
service that address both the Muslims and non-Muslim community
need.

Statement Response Frequency Percentag

e

29
 Bank of Abyssinia is Strongly agree 13 31%
engaging in interest free
Agree 13 31%
banking service that address
both the Muslims and non- Neutral 7 17%

Muslims community need Disagree 5 12%

Strongly disagree 4 9%

Total 42 100%

As we have clearly understand from the table depicted above, 13(31%) and
again 13(31%) of the respondents believe that BA is engaged in IFB service
(saving and loan service) that address the Muslim and non-Muslims need and
17% of the respondents does not give their opinion and finally 5(12%) and
4(12%) respondents are disagree and strongly disagree with the same issue.
From the respondents we can conclude that BA is engaging to satisfy its
customers need (both Muslim and non-Muslim) this is better strategy in
attracting more customers irrespective of their religion.

Table 4.5.6 Interest free banking is one means of resource

mobilization in banking industry.
Statement Response Frequency Percentag
e

Strongly 15 36%
Interest free banking is one agree
means of resource mobilization in
Agree 16 38%
banking industry.
Neutral 4 9%

Disagree 7 17%

Strongly 0 0%

30
 disagree

Total 42 100%

The table above illustrates that interest free banking service as a means of
resource mobilization. The result presented indicates that most of respondents
16(38%) and 15(36%) were responded agree and strongly agree respectively,
4(9%) has a neutral idea on the issue. On other hand, 7(17%) were disagree and
no one is strongly disagree. This implies that starting the service has a potential
for deposit mobilization and a good reason for those who want to start the
service to acquire additional banking option.

Table 4.5.7 Customers are satisfied with interest free banking

service.
Statement Response Frequency Percenta
ge

Strongly 8 19%
Customers are satisfied with agree
interest free banking service.
Agree 7 17%

Neutral 3 7%

Disagree 13 31%

Strongly 11 26%
disagree

Total 42 100%

From the above table, whether the customers were satisfied or not were asked to
the customers themselves. The result shows that more than 50% (57%) of the
respondents are not agree with the statement and only 19% and 17%
respondents were strongly agree and agree respectively. Because of the larger
number of respondents were disagreed, there is a tendency of dissatisfaction by
customers. This shows that there is still unused opportunity to be exploited by

31
IFB to provide customer satisfaction. With these issue customers were asked by
open ended questions whether they observe another challenge that IFB faced.
And some sample respondents replied that even they were partially, they are not
fully satisfied because there is no interest free lending rather than interest free
deposit. Also respondents replied that there is only one interest free banking
window that give service to the customers.

Table 4.5.8 there is high demand for interest free banking

Statement Response Frequency Percentag
e

Strongly 10 24
There is high demand for agree
interest free banking
Agree 14 33

Neutral 5 12

Disagree 6 14

Strongly 7 17
disagree

Total 42 100

The respondents were also asked if they perceive a high demand for in service
IFB by the society. The result revealed that 57% agree with the statement and
12% did not give their opinion on the issue. And finally 31% of the respondents
were not agree. Taking the number of the respondents in to consideration, we
can conclude that there is demand for the IFB service and the higher demand of
the bank shows that there is good opportunity to grow in size and service.

32
 CHPTER FIVE
5. CONCLUSION AND RECOMMENDATION

The main objective of this study is to examine opportunities and challenges of

interest free banking service in case of Bank of Abyssinia Dire Dawa city in
Sabiyan branch. Based on the finding of the study, this chapter presents the
conclusion and recommendation.

5.1 Conclusion

From the study, the researcher can conclusions are as follow: -

 Muslims are the larger users of interest free banking service since from
the sample respondents 83% were Muslims.
 The main reason why customers of IFB are using IFB service is due to
the prohibition of interest in their respective religious principle (Holy
Quran, Holy Bible)
 The researcher concludes that important number of customers’ needs
awareness about interest free banking system.
 Researcher recognized that there is misconception about IFB because
more than 50% respondents replied that interest free banking is launched
for only Muslims.
 There is lack of qualified personnel and competent sharia advisor as well
as wrong association with religion.

 Lack of segregation of job, weak motivation and reward, parallel

operation with conventional bank, lack of interest free lending and having
33
inadequate IFB window is challenge facing IFB as some responders from open
ended questions reply.
 The researcher concluded that IFB is motivating the society for saving
and investment.
 The finding shows that, IFB is engaging to satisfy its customers need.
 The finding also shows that starting the service has a potential for deposit
mobilization and a good reason for those who want to start the service to
acquire additional banking option.
 The study also shows that the demand for interest free banking service is
increasing and this is an important opportunity for IFB.

5.2 Recommendations

Based on the aforementioned conclusions the researcher recommends and

suggests the following: -

 In order to exploit the benefit that can be achieved from provision of

starting interest free banking service, it is better to create awareness by
banks starting the service and those who want to start the service. Officials
of those banks play a vital role in educating the public about interest free
banking service and product.
 It is recommendable to make more effort by interest free bank to market
their product and it is better to use several promotion plans to create
awareness.
 In order to create appropriate knowledgeable staffs, it is advisable to design
further training and capacity building programs in the field of IFB.
 If interest free banking is expected to be developed, it is better to employ
skilled employees who are able to comply with sharia as the larger number
of the service users are Muslims.

34
 Separation of job is better to have a good knowledge about interest free
banking service, motivation and reward have positive effect to depositors
and it is better to give reward for depositors to attract more customers.
 It is better to provide interest free lending to encourage saving and
investment and to get more customers than before.
 It is better to open additional window to facilitate the process and to
enhance customer satisfaction.

35
 REFERENCES
Abdullah Saeed (1999) Islamic Banking and Finance in Theory and Practice: A
Survey of State

Of the Art”, Islamic Economic Studies, Vol. 13, pp. 1-48. Abdulmajid ET. al
(2010) efficiency in interest free banking and Conventional banking.

Akmel Haylu (2015) Challenges and opportunities of Islamic banking in resource

mobilization, Addis Ababa University.

Archer, S., & Karim, R. A. A. (2006). On capital structure, risk sharing and capital
adequacy in Islamic banks. International Journal of Theoretical and Applied
Finance, 9(03), 269-280.

Brown, (2005) Banking Theory and practice 18th Edition

Campbell Harvey, (2010) Introduction to Islamic Banking and Finance, Willy, UK.

Dinka Leta (2018) challenges and opportunities of interest free banking, Arba
Minch University.

Elaine Housby, (2011) Islamic financial services in UK, Edinburgh University

press.

Herald F and Heiko H (2009) “Determinants of commercial banks deposit in

regional financial center”

Ibrahim Warde, (2010) 2nd edition, Islamic finance in global economy, Edinburgh
university press.

IMF, (2015) Money, Banking and Monetary Policy, USA, Dryden Press, a division
of Holt, Rinehart and Winston Inc.

1
Iqbal M, (2014) An introduction to Islamic banking, Journal of Islamic banking
and finance

Ismael, et al. (2010) Interest and Islamic Economics

Karbhari, Y., Naser, K. and Shahin, Z. (2004) Problems and challenges facing the
Islamic banking system in the west: The case of the UK. Thunderbird International
Business Review,46 (5), pp. 521-543.

KerimaAli, (2016) “challenges on Interest Free Banking Service” Addis Ababa

University

Mohamed taqi, Usmani Karachi (1996) Imperatives of Financial innovation for

Islamic banks International journal of Islamic financial services, 4(3).

Mohammed & Mahdi, (2010) the role of inflation in financial repression.

Mohammed (2012) “The prospects, challenges & opportunities of Islamic banking

in Ethiopia

Nur Aqilah Zainordin, (2016) challenges and opportunities of islamic banking and
financial institutions in malaysia.

Rodney Wilson, “Challenges and opportunities for Islamic banking and finance in
the west: The United Kingdom Experience” Vol.7, Nos. 1 & 2, Oct.99 &
Apr.2000, pp36- 58.

Tsion Sisay, (2017) “challenges and opportunities of interest free banking” on

commercial banks of Ethiopia Addis Ababa University

Usmani, T (2004) An Introduction of Islamic Finance: Local Challenges, Global

Opportunity’s, Cambering, Center for Middle Eastern Studies, Harvard University.

2
 APPENEXES
QUESTIONNAIRE

RIFT VALLEY UNIVERSITY

DIRE DAWA CAMPAS

DEPARTMENT OF ACCOUNTING SND FINANCE

Dear sir/madam!
This questionnaire is prepared by Mehadi,Hanifa and Lensa in order to collect
primary data from respondents on the research entitled “Challenges and
3
Opportunities of Interest Free Banking Service” in Bank of Abyssinia, Dire Dawa
city in Sabiyan branch.
The purpose of the study is for the partial fulfillment of the requirements of BA
degree in Accounting and Finance. For the successful accomplishment of the
study, the response of the respondents would have a vital role by being used as
valuable input for the study. I assure you that the information to be shared by you
would be used only for academic purpose and kept confidentially. So you are
kindly requested genuinely fill the questionnaire.
Thank you in advance for your cooperation!!
INSTRUCTION:
 No need of writing your name.
 You can give more than one answer for a given question if necessary.
 Put “X” marks in front of the appropriate box for questions.

 Part one: Respondents Profile

1. Gender Male Female

2. Age
20-30 31-40 41 -50 & Over 50

3. Religion
Muslim Non- Muslim

4. Education Level

4
 No Grade10-12 Diploma Certificate Degree above
first degree

 Two: Respondents opinion about interest free banking service

5. Currently do you use bank services?

Yes No
6. Based on your judgment why do you choose Bank of Abyssinia?
Locational accessibility
Variety of number of services including interest free banking
service
Satisfaction by service they provide
Absence of option
7. Why do you choose using interest free banking than conventional banking?
Prohibition of interest in Holly Qur’an
Prohibition of interest in Holly Bible
Less risky than conventional one
Because it has a role in economic development
Other reasons
8. Interest free banking is launched for only Muslims.
Strongly agree Agree Neutral Disagree strongly
disagree
9. The only intention of establishing IFB is to provide interest free service for those
who do not want interest.
Strongly agree Agree Neutral Disagree
strongly disagree
10. There is misunderstanding and lack of awareness about interest free banking.

5
 Strongly agree Agree Neutral Disagree strongly
disagree
11. Lack of qualified human resource and competent sharia advisor is another
challenge of IFB.
Strongly agree Agree Neutral Disagree
strongly disagree

12. There is negative attitude of people regarding interest free banking (wrong
association with religion).
Strongly agree Agree Neutral Disagree strongly
disagree

13. Not only Muslims are taking interest free banking service or other communities
are also taking the service.
Strongly agree Agree Neutral Disagree strongly
disagree
14. The offering of interest free banking products (Saving and Loan Service) will
improve the tendency for business expansion and investment.
Strongly agree Agree Neutral Disagree strongly
disagree
15. Interest free banking is flexible and easy to adopt the financial system.
Strongly agree Agree Neutral Disagree strongly
disagree
16. Interest Free Banking Service motivates the society for saving and investment
in Dire Dawa city.

6
 Strongly agree Agree Neutral Disagree strongly
disagree
17. Interest free banking service is able to fulfill the societies need around Dire
Dawa city and as well helpful for Ethiopian economy.
Strongly agree Agree Neutral Disagree strongly
disagree

18. The reason why many people were not using banking service for was due to the
fact that the banking service were operating with interest.
Strongly agree Agree Neutral Disagree strongly
disagree
19. Bank of Abyssinia is engaging in interest free banking service that address both
the Muslims and non-Muslim community need.
Strongly agree Agree Neutral Disagree
strongly disagree
20. Even if interest free banking is providing service for Non -Muslims, it gives
priority to Muslim community.
Strongly agree Agree Neutral Disagree strongly
disagree

21. The current global trends in financial service will have positive manifestations
on the future of interest free banking service
Strongly agree Agree Neutral Disagree strongly
disagree
22. Interest free banking is one means of resource mobilization in banking
industry.

7
 Strongly agree Agree Neutral Disagree strongly
disagree
23. Customers are satisfied with interest free banking service.
Strongly agree Agree Neutral Disagree strongly
disagree
24. There is high demand for interest free banking service.
Strongly agree Agree Neutral Disagree strongly
disagree
25. If you have observed any other challenges related to interest free banking
service?
----------------------------------------------------------------------------------------------------
--------------------------
26. If you have observed any other opportunities regarding to interest free banking
service?
----------------------------------------------------------------------------------------------------
------------------------------

 INTERVIEW QUESTION FOR MANAGE

1. What are the major challenges that your bank encounter while rendering IFB?

2. What are the complaints from your customers on your customers?

3. What are the benefits that your bank gets after starting Interest Free Banking
Service?

8
9