4 November 2017

Ethiopia: Dashen Embarks On Interest-Free Banking Service

Following the finalisation of its headquarters, Dashen Bank is to embark on interest-free banking (IFB) services after getting approval from the National Bank of Ethiopia (NBE) on October 25, 2017.

The service involves payments without interest and will be available on separate counters at the bank's branches. It aims to grab the attention of individuals, companies, enterprises and non-governmental institutions.

IFB was announced concurrently with the inauguration of the Bank's newly constructed 24-storey headquarters, costing a little over a billion Birr. Sprawled on 3,495sqm of land, the finishing works of the building were executed by MIDROC Construction.

IFB service is an option similar to conventional banking systems except differing on the concepts of interest rates and exclusion of businesses engaged in gambling, sales or production of pork and alcohol.

Dashen's IFB service, known as Sharik, will be implemented in one-third of the Bank's branches, which has reached 329 to date, unlike Bank of Abyssinia that got the green light from the central bank to execute the service in all of its branches.

"We want the service to grow naturally," said Mesfin Bezu, IFB director at the Bank, explaining the reason for the service being limited to a few branches.

Services that are provided under IFB include deposits, loans, foreign exchange and remittance.

The services of the Bank under IFB are four: Amanah- keeping money safe on trust, Qerd- a current account that allows transactions with cheques, Mudaraba- an investment account, and Mudaraba Time Deposit Account- where the customer saves money for a fixed period and withdrawal is done on notice, not on demand.

Upon starting the service in this fiscal year, Dashen will be the tenth bank to do so.

"The Bank's management has been assessing the market and preparing for the launch for the past three years," said Mesfin.

The history of interest-free banking services in Ethiopia dates back to 2010, during the initiation of the unrealised bank, Zemzem.

Three years later, following the introduction of a new directive to govern the IFB, Commercial Bank of Ethiopia (CBE) pioneered to provide such services- having a customer base of close to half a million so far. CBE was followed by Oromia International Bank that has 135,000 IFB service users.

"Noticing a relaxing legal framework, we decided to start IFB," said Mesfin. "Demand of the customers for the service is also elastic."

Dashen, under its conventional banking system, has a product known as special demand deposit that enables customers to save money without interest. Presently, it has mobilised a special demand deposit of over a billion Br.

"This shows that there is an untapped market in the country," said Mesfin.

Abdulmenan Mohamed, an expert with 15 years of experience, concurs.

"As it is an unexploited market, it is the right time for Dashen to launch the service," he said. "Even though its size is smaller compared to conventional lending, it is growing."

Any service given by Dashen under IFB will be recorded in a separate account. The Bank has assigned 40 employees for the service alone, whereas two employees will be deployed in each of the Bank's branches where the new service is implemented.

"It is also good news for foreign and local investors uninterested in earning interests from banks," said Mesfin. "It must also be noted that the service will have a significant impact in raising the banked population in the country.

Despite the opening of over 17 banks, 16 insurances and 35 microfinance institutions over the past 25 years, the adult banked population remains significantly low, reaching 22pc in the past fiscal year. Aiming to raise its outreach, the central bank set a financial inclusion strategy to increase the banked population by three folds.

Being the second oldest private bank in the country, Dashen is amongst the top performers next to Awash Bank. In the past fiscal year, it managed to earn a gross profit of around a billion Birr from operational activities- close to 400 million Br lower than its peer, Awash.

Abdulaziem Mohammed, a businessman, is amongst those who applauded the move of the Bank to introduce the new service.

"It encourages a person like me, who does not want interest on his deposits," he commented. "But, the service must strictly adhere to the law set for IFB."

The Bank has already set a board that comprises of five scholars to closely follow the implementation of IFB, according to Mesfin.

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