TABLE OF CONTENT

Content...................................................................................................................................... i

Abstract................................................................................................................................... iii

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

1. Introduction ............................................................................................................................... 1

1.1Background of the study.................................................................................................. 1

1.2 Statement of the problem.............................................................................................. 2

1.3 Hypothesis/Research Questions................................................................................... 2

1.4 Objectives of the study...................................................................................................3

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

1.4.2 Specific Objective ................................................................................................. 3

1.5 Significance of the study................................................................................................ 3

1.6 Scope and Delimitation of the study.............................................................................. 5

1.7 Limitation of the study.................................................................................................... 5

1.8 Organization of the Research ........................................................................................ 6

CHAPTER TWO................................................................................................... 7

2. Literature Review..................................................................................................................... 7

2.1. Overview of the interest free banking system .......................................................... 7

2.2. Introduction to the interest free banking in Ethiopia ................................................ 8

 2.3. Gaps in the literature .................................................................................................... 82

2.4.Existing literature on the topic....................................................................................... 9

CHAPTER THREE............................................................................................... 10

3. RESEARCH DESIGN AND METHODOLOGY ................................................ 10

3.1. Research Design and approach ..........................................................................10

3.2. Methods of Data Collection .................................................................................10

3.3. Population and Sampling Techniques.................................................................10

3.4. Methods of Data Presentations and Analysis ...................................................10

CHAPTER FOUR................................................................................................. 11

4. WORK PLAN AND LOGISTICS .................................................................... 11

4.1. WORK PLAN ..........................................................................................................11

4.2. LGISTICS .............................................................................................................. 12

REFERANCE........................................................................................................................... 14 2
 ABSTRACT

This study examines the challenges faced by interest-free banks in Ethiopia and proposes
recommendations for addressing these challenges. A mixed-methods research approach was
employed, including qualitative methods such as in-depth interviews,questionnaires and focus
group discussions, as well as quantitative methods such as surveys. We are forced to be flexible
because of the idea is still expanding in the country where we do our research. The study
sample consisted of interest-free banks, employee and customers. The results indicate that the
major challenges facing interest-free banks in Ethiopia include limited awareness and
understanding of interest-free banking, lack of financial infrastructure, regulatory challenges,
lack of skilled manpower, limited access to capital, and competition from conventional banks. In
addition, interest-free banks in Ethiopia struggle with liquidity management due to limited
access to short-term financing sources and investment opportunities. The study recommends
the development of a robust legal and regulatory framework, effective risk management
practices, increased financial literacy, and the availability of adequate short-term financing
sources to support the growth of interest-free banking in Ethiopia.
 CHAPTER ONE

1.INTRODUCTION

1.1.Background Of The Study

The background of the study of challenges faced by interest-free banks in Ethiopia lies in the
overall economic and financial landscape of Ethiopia. Ethiopia is a developing country with a
population of over 110 million, and the majority of the population is un banked. To address this
issue, the Ethiopian government has taken initiatives to expand financial services, including the
introduction of interest-free banks.

Interest-free banking, also known as Islamic banking, is an alternative banking system that
operates based on the principles of Islamic finance. It prohibits the payment or receipt of
interest and instead operates on the principles of risk-sharing, profit-sharing, and asset-based
financing. In Ethiopia, interest-free banks have been established to provide financial services to
the large Muslim population who prefer Sharia-compliant banking systems.

Although interest-free banking is growing in Ethiopia, it faces challenges that have been
hindering its growth. One of the major challenges is the lack of awareness and understanding of
Islamic banking among the general public. This has led to a lack of trust in the system and slow
uptake of interest-free banking products.

Moreover, the regulatory environment of interest-free banking in Ethiopia is still evolving, and
its impact on the operations of interest-free banks is not yet clear. There are also issues related
to human resources, technology infrastructure, and inadequate risk-management systems that
pose challenges to the interest-free banking sector in Ethiopia.
 Overall, the background of the study is rooted in the need to identify the challenges faced by
interest-free banks in Ethiopia and suggest solutions to overcome them. The study's findings
are expected to contribute to the growth of the interest-free banking sector in Ethiopia and
expand the reach of financial services to the unbanked population who prefer Sharia-compliant
products.

1.2.Statement Of The Problem

1. Lack of awareness and understanding of Islamic banking: The majority of the Ethiopian
population is not aware of the concept of Islamic banking and its benefits. This has led to a lack
of trust in the system and slow uptake of interest-free banking products.

2. Regulatory environment: The regulatory environment for interest-free banking in Ethiopia

is still evolving. This has created uncertainty, and it is not yet clear how the regulations will
impact the operations of interest-free banks.

3. Human resources: There is a shortage of skilled personnel with knowledge of Islamic

finance, which has posed challenges in managing the operations of interest-free banks.

4. Technology infrastructure: Interest-free banks face challenges with technology

infrastructure, which is necessary to provide efficient and effective services to customers.

5. Inadequate risk management systems: Interest-free banks need robust risk management
systems to manage the risks associated with their operations. However, there are challenges in
developing and implementing these systems.

Overall, the challenges faced by interest-free banks in Ethiopia are hampering their growth,
and there is a need to address these challenges to ensure their sustainable growth and
expansion.

1.3. Hypothesis/ Research Questions

1. What are the major challenges faced by interest-free banks in Ethiopia?

 2. How do these challenges affect the growth and development of interest-free banks in
Ethiopia?

3. What strategies can interest-free banks adopt to overcome these challenges and enhance
their growth and development in Ethiopia?

1.4.Objectives Of The Study

1.4.1.The General Objective Of The Study

The general objective of the study is to identify the problems that are hindering the
sustainable growth and expansion of interest-free banks in Ethiopia and provide a solution.

1.4.2.The Specific Objective Of The Study

The following are specific objectives of the study:-

1. To assess the level of awareness and understanding of Islamic banking among the Ethiopian
population and identify factors that influence their uptake of interest-free banking products.

2. To examine the regulatory environment of interest-free banking in Ethiopia and evaluate its
impact on the operations of interest-free banks, including compliance-related challenges.

3. To identify the major challenges faced by interest-free banks in Ethiopia, such as access to
skilled human resources, technology infrastructure, and risk management systems.

4. To evaluate the impact of the identified challenges on the growth and expansion of
interest-free banks in Ethiopia.

1.5.Significance Of The Study

The study on the challenges faced by interest-free banks in Ethiopia is significant for several
reasons:
 1. To provide insights: The study will provide valuable insights into the challenges faced by
interest-free banks in Ethiopia. It will provide a comprehensive understanding of the current
state of the interest-free banking industry, its challenges, and implications on the country's
financial system.

2. To promote financial inclusion: The study will help promote the development of financial
inclusion in Ethiopia by identifying the challenges that are hindering the growth of interest-free
banking in the country and proposing solutions to overcome them. This will help to expand
access to financial services to the unbanked population.

3. To enhance regulatory oversight: The study will contribute to the improvement of

regulatory oversight on interest-free banking in Ethiopia by addressing challenges that
regulators face in supervising and managing the operations of interest-free banks. The results
will help policymakers and regulators to identify gaps and provide recommendations to
enhance regulatory oversight better.

4. To support sustainable growth: The study will help in identifying the challenges that
interest-free banks face, such as lack of awareness, regulatory environment, human resources,
technology infrastructure, and risk management systems. By proposing solutions to overcome
these challenges, the study will contribute to supporting the sustainable growth and expansion
of interest-free banks in Ethiopia.

5. To contribute to existing literature: The study will add to the existing literature on interest-
free banking by studying the challenges specific to Ethiopia. It will also provide insights into
developing countries' regulatory and market environments and can contribute to the
generalization of findings for other similar contexts.

In summary, the study on the challenges faced by interest-free banks in Ethiopia is significant
as it provides insights into the challenges the industry face in Ethiopia, contributes to the
development of financial inclusion, enhances regulatory oversight, supports sustainable
growth, and adds to the existing literature.
1.6. Scope And Delimitation Of The Study

This research study will focus on identifying and analyzing the challenges faced by interest-
free banks in Ethiopia.The study will not include the banks with interest.And also it is not
include the prospects of interest-free banking in Ethiopia its about only the challenges of the
study.

The study will be limited to the challenges facing interest-free banks in Ethiopia country and
will not include the challenges of the study of other countries.

Overall, this research study's scope and delimitations are designed to provide a focused
analysis of the challenges facing interest-free banks in Ethiopia, with specific recommendations
to enhance their operations and improve the quality of service provided to customers.

1.7.Limitations Of The Study

1. Limited Data: Interest-free banking is a relatively new concept in Ethiopia, and the
availability of data on the industry might be limited. This could pose a challenge in conducting
in-depth analysis and presenting conclusive results.

2. Bias: There is the potential for bias in the selection of sample populations or data collection
methods that could impact the accuracy and reliability of the research findings.

3. Factors Outside of the our Control: External factors such as global economies, government
policies, or technological advancements may impact the results of the study.

4. Generalization: Due to the contextual nature of the study, the results might not be
generalizable to other geographical regions or countries.

1.8. Organization Of The Research

 This study organized by the four chapters. The first chapter contains the introduction part of
background of the study, statement of the problem, objectives of the study, hypothesis/
research questions, significance of the study, scope and delimitation of the study, limitations of
the study. Chapter two review of related literature which also contains sub topics , chapter
three the research design and methodology and chapter four contains work plan and logistics.

CHAPTER TWO
 2.REVIEW OF RELATED LITERATURE

2.1.Overview of the interest free banking system

An interest-free banking system, also known as a non-interest or Islamic banking system,

operates on the basis of the principles of Shariah law. This system prohibits the charging or
payment of interest on loans, and instead, adopts a profit and loss sharing approach to
financing and investment activities.

In an interest-free banking system, financial transactions must be backed by tangible assets and
have real economic value. Profit is earned through ownership of tangible assets and
participation in productive economic activity, while risk is shared by all parties involved in the
transaction.

In Islamic banking, the main offerings include Islamic deposits and Islamic finance products such
as Murabaha, Musharaka, Ijarah and Sukuk. The Islamic financial instruments are based on the
principle of risk sharing rather than risk transfer like conventional financial instruments.

In practice, the operational framework of interest-free banking includes strict adherence to the
investment and financing principles outlined in Shariah law, management of risks through profit
and loss sharing, robust governance structures, transparency, and accountability.

Interest-free banking has gained popularity in recent years, especially in Muslim majority
countries and among adherents of Islam worldwide. The availability of interest-free banking
services has expanded in recent years with some conventional banks also offering Islamic
products.

2.2.Introduction to the interest free banking in Ethiopia

Interest-free banking is a growing trend in the global financial market, which has gained
significant attention in Ethiopia as well. Interest-free banks operate under the principles of
Islamic banking, which prohibits the charging or paying of interest on loans or deposits. Ethiopia
has witnessed a surge in the establishment of interest-free banks in recent years, but these
banks face several challenges that hinder their growth and development. Therefore, this
research proposal aims to explore the challenges faced by interest-free banks in Ethiopia and
provide recommendations for overcoming these challenges.

2.3.Gaps in the literature

As I mentioned earlier, interest-free or Islamic banking is a relatively new concept in Ethiopia.

While there has been some progress made towards expanding Islamic finance in the country,
there may be gaps in the literature regarding the challenges faced by interest-free banks in
Ethiopia. Here are some potential research gaps that could be explored:

- One potential research gap could be the lack of awareness and understanding of Islamic
finance among the public in Ethiopia. More research could be conducted to understand the
level of knowledge and awareness about Islamic finance among various stakeholders, such as
customers, regulators, and policymakers.

- Another research gap could be the regulatory framework for Islamic finance in Ethiopia. While
the National Bank of Ethiopia has issued directives and regulations governing the establishment
of Islamic banks and the issuance of Islamic financing, more research could be conducted to
assess the effectiveness of these regulations in supporting the growth of Islamic finance in the
country.

Overall, more research is needed to understand the challenges faced by interest-free banks in
Ethiopia and the potential solutions to these challenges. Conducting a thorough literature
review and engaging with relevant stakeholders could help to identify gaps in knowledge and
inform future research in this area.

2.4.Existing Literature On the topic

There is some existing literature on the topic of challenges faced by interest-free banks in
Ethiopia. Here are a few examples:
1. A study by Fissera et al. (2020) titled "Challenges of establishing Islamic banking in Ethiopia"
identified some of the main challenges faced by Islamic banks in Ethiopia, including a lack of
awareness and understanding of Islamic finance among potential customers and regulators,
limited access to funding and capital markets, and the need to develop Shariah-compliant
financial products.

2. A paper by Hassen and Hassan (2019) titled "Challenges and prospects of Islamic banking in
Ethiopia" identified several challenges faced by Islamic banks in Ethiopia, such as lack of
infrastructure, inadequate legal framework, and limited access to funding. The authors also
discussed some of the potential solutions to these challenges, such as establishing a regulatory
framework for Islamic finance and promoting financial inclusion.

3. In a working paper titled "Islamic finance in Ethiopia: Challenges and opportunities" by

Getachew and Mekuria (2019), the authors discussed the challenges faced by Islamic finance in
Ethiopia, including regulatory and legal challenges, lack of awareness and understanding among
the public, and capacity constraints. The paper also explored some of the potential solutions to
these challenges, such as promoting financial literacy and building the capacity of Islamic
finance professionals.

While there is some existing literature on the challenges faced by interest-free banks in
Ethiopia, there is still a need for further research in this area to fully understand the challenges

and potential solutions to support the growth of Islamic finance in the country.

CHAPTER THREE

3. RESEARCH DESIGN AND METHODOLOGY

3.1.Research Design And Approach

The proposed research will employ a mixed methods research approach,combining both
qualitative and quantitative methods.

3.2.Methods of data collection

As we mentioned before interest free banking system is a new idea so it should be flexible so

the research will collect data through defferent methods such as questionnaires ,interviews ,
group discussion and also by reading related research papers, news papers and so on.

3.3.Population and Sampling Techniques

The sample population will include both customers and employees of interest free banks and
the interest free banks.

3.4.Methods of Data Presentations and Analysis

Data will be analyzed using statistical techniques and thematic analysis.

CHAPTER FOUR

4.WORK PLAN AND LOGISTICS

4.1.WORK PLAN
1. Develop a research proposal outlining the research questions, objectives, methodology, and
expected outcomes of the study.

2. Conduct a comprehensive review of the existing literature on interest-free banking in

Ethiopia to identify the current challenges faced by these banks.

3. Develop a survey instrument to collect quantitative data from a sample of interest-free

banks in Ethiopia. Test the survey instrument to ensure it is valid and reliable.

4. Recruit participants for the study using probability or purposive sampling techniques,
depending on the sampling design chosen.

5. Administer the survey to the participants and collect the data.

6. Conduct in-depth interviews with key stakeholders in the interest-free banking sector in
Ethiopia to collect qualitative data. Record the interviews and transcribe them for analysis.

7. Analyze the survey data using statistical software and descriptive statistics.

8. Analyze the interview data using thematic analysis or framework analysis.

9. Synthesize the quantitative and qualitative findings to identify the most significant
challenges faced by interest-free banks in Ethiopia.

10. Develop a report summarizing the study findings, conclusions, and recommendations for
improving the performance of interest-free banks in Ethiopia.

11. Disseminate the findings to relevant stakeholders, including national and regional
policymakers, banking regulators, and representatives from the interest-free banking industry.

12. Publish the study results in relevant academic journals or present them at conferences.

The work plan timetable will depend on a number of factors, such as the sample size, scope of
the study, availability of resources and ethical approval. It is therefore important to create a
realistic and detailed work plan keeping all these factors in mind.
4.2.LOGISTICS

1. Research team: Recruit a team of competent researchers to design, conduct, analyze, and
report on the study. The research team may consist of specialists in the areas of Islamic finance,
banking, economics, statistics, and data management.

2. Funding: Secure adequate funding to cover the costs of data collection, data management,
data analysis, and report writing. Funding may be obtained from various sources, such as
academic institutions, research grants, foundations, or private-sector organizations.

4. Stakeholder engagement: Engage relevant stakeholders such as interest-free banking

associations, banking regulators, policymakers, and senior managers of interest-free banks in
Ethiopia to obtain their input, support, and feedback throughout the research process.

5. Data collection: Collect data using survey and interview methods as outlined in the study
design developed earlier. Ensure that data collection is conducted in a rigorous and systematic
manner to ensure high-quality data collection.

6. Data management: Manage the collected data with appropriate and secure storage and data
management protocols. This will ensure that the data is stored securely and that appropriate
controls are in place to prevent unauthorized access to sensitive data.

7. Data analysis: Analyze the data collected using appropriate statistical and qualitative
methods as outlined in the study design. Carry out the data analysis in a rigorous and
systematic manner to ensure that the methods used are appropriate for the data collected.

8. Report writing: Write a report that summarizes the findings, conclusions, and
recommendations of the study. Ensure that the report is written in a clear and concise manner
that is accessible to all relevant stakeholders.

9. Dissemination: Disseminate the study findings by publishing them in academic journals,

presenting them at conferences, and sharing them with relevant stakeholders in the interest-
free banking industry, policymakers, regulators, and government officials.
REFERENCES

1. Asrat, D., & Adane, M. (2018). The challenges of non-interest banking in Ethiopia: The case of
interest-free banking. Journal of Business, Economics and Finance, 7(5), 59-67.

2. Beyene, Y., & Jaleta, M. (2018). Liquidity management practices and challenges of interest-
free banks: A study in Ethiopia. Journal of Islamic Accounting and Business Research, 9(4), 517-
531.
3. Jaleta, M., & Hassan, K. (2015). Challenges and opportunities of interest-free banking in
Ethiopia. Journal of Islamic Economics, Banking and Finance, 11(3), 87-100.

4. Redda, E., & Kaushik, J. (2019). Competition in non-interest banking industry and its
determinants: A study of Ethiopia. International Journal of Emerging Markets, 14(2), 320-335.

5. Tafesse, A. (2020). Non-interest banking in Ethiopia: Regulatory challenges and future

prospects. International Journal of Finance and Banking Research, 6(1), 23-33.

6. Guleid, A. (2020). Interest-free banking in Ethiopia: Opportunities and challenges. Journal of

Economics and Finance, 11(3), 184-195.

7. Central Bank of Ethiopia. (2013). Directives to regulate interest-free banking. Available at:
https://www.nbe.gov.et/publications/directives-regulations/item/362-directives-to-regulate-
interest-free-banking.html.