Islamic Banks are not Religious Banks

Nassir Dino (PhD), associate professor of software engineering, is chairman of the organizing committee of ‘Zamzam Bank’. He is also the cofounder and president of Higher Learning Center of Excellence (HiLCoE), a specialized centre of excellence in education, research and consultancy in the field of information and communication technology (ICT). The Centre was established in 1997 and has since graduated thousands of skilled professionals.
Thirteen years ago, Nassir started to establish Zamzam, the first Islamic bank in Ethiopia. However, his effort did not bore fruit because the National Bank of Ethiopia (NBE), the financial regulatory body, denied them license to start operations in the final hours.
After 13 years of patience, however, his effort got favorable response from the administration of Prime Minister Abiy Ahmed (PhD). During the holy month of Ramadan, on May 22, Yinager Dessie (PhD), the new governor of NBE, met the founders of Zamzam; and informed them the good news. After more than a decade of stall, the Governor told them to resurrect Zamzam. On the same day, the Premiere also reaffirmed his support for the realization of the bank. This was announced in a historic speech the PM made at the grand Iftar at the Millennium Hall. For Nassir, his team and the tens of millions of Ethiopian Muslims, the ecstasy the news created was unprecedented and is still afresh.
Zamzam has already started floating shares and is set to start operations in about a year. EBR’s Ashenafi Endale discusses with the professor who also studied Islamic Banking and Islamic Insurance in London, the UK, about the prospect of the bank.

EBR: Tell me how you came with the idea of establishing Zamzam.
Nassir: When we came with the business idea of establishing a bank, our aim was to create an alternative access to finance. Islamic financial institutions are rising globally. There are 40 such banks in the United States alone. The United Kingdom is also becoming a hub for Islamic finance. Many other European countries have such banks too. The growth of Islamic banks is very promising in South Africa, India, Japan, and even in China. In fact, their growth rate is higher than the growth rate of conventional banks. So we wanted to replicate the same success stories in our country by provide innovative financing.

What are the benefits of Islamic banks?
Ethiopia has lost so much investment opportunities because of the lack of Islamic banks. For instance, our College (HiLCoE) had a project to invest in the telecom sector. About 14 years ago, we partnered with an Abu Dabi-based satellite telecommunication company to provide internet and telecommunication services. But because the telecom sector was monopolized; and there was no interest free banking service provider; we missed the opportunity. The country loses a lot of such investment opportunities because of the absence of Islamic banks.

Similarly, my friends once wanted to establish a cement factory. They raised ETB500 million, which was half of the total investment cost they needed. However, they were unable to access the rest of the financing from a bank that provides interest-free financing. So, their initiative couldn’t materialize. Some families don’t even send their children to public universities because they cannot pay their cost sharing all at once to avoid interest. For Muslims, paying interest is usury; it is against Sharia.

Banks, like Zamzam, have the potential to solve the housing problem in the country. When Zamzam becomes operational, anyone can own a house by simply paying 20Pct of the cost of the house annually. The absence of such banks created a social crisis, besides being a challenge to improve financial inclusion in the country.

How did you raise the issue of Islamic banking to Ethiopian government?
When we first contacted officials at the National Bank of Ethiopia in 2007, there was no legal framework for the establishment of Islamic banks. We were told to ask the Office of the Prime Minister for permission. If the PM office gives us the go ahead, they promised to draft a proclamation that will allow the formation of Islamic banking.

We then began exploring the channels that can help us to get through to the PM office. We thought the discussion platform between government officials and the Diaspora could be one of the opportunities to raise the issue. So, we suggested to the organizers of the meeting that the issue of Islamic banking should be raised in their discussion.

Meanwhile, we were also lobbying officials at the Commercial Bank of Ethiopia (CBE) to start interest free banking service at a window level. We were concerned that if we directly ask permission to establish a full-fleged Islamic banking, the government officials might think that we have a political agenda. Although we were confident that we came up with a golden idea, we were also considerate of the situation in the country.

So we met Abay Tsehaye, who was Board Chairperson of CBE; and an advisor to the PM at the time. We told him how critical Islamic banking is for our business. We also suggested that CBE should start providing interest-free banking at a window level. Surprisingly, Abay recommended us to even work on establishing a full-fledged Islamic bank.

He also promised to discuss the issue with the late Prime Minister Meles Zenawi. Shortly after, he said Meles wants to know about the rational of the project. That was a great opportunity for us. We said to ourselves, if we fail to persuade the Premiere, there won’t be a second chance to raise the issue again. So, we conducted a world class research on Islamic banking and why it’s important to our country. We carefully studied the situation and even looked for any failed Islamic banks globally to learn from their failure; the successful ones are widely known. So we found one bank which failed; but the reason for their failure was not due to financial crisis; it was a misunderstanding between the shareholders. We also assessed the successful ones very carefully. We used IMF and World Bank data and analysis on Islamic banking.
Islamic banks have been very popular since the 1930s. Many economists recommended Islamic banking and equity financing as a solution to cure the economic depression in 1930s around the globe.

Together with many researchers, we finalized the study and sent it to the Office of the PM. One of our biggest achievements in the history of Zamzam is indeed this research. The research answers what Ethiopia lost because of the absence of Islamic banks.

After seeing the research, the late Prime Minister Meles told us that the concept is very clear and encouraged our team to keep working until the project materializes. He also promised us that he will take care of the legal framework. He advised us to work on the knowledge transfer and filling the skill gap aspects of the challenge the project might encounter. Then, the NBE included Islamic banking services in the 2008 banking business proclamation. The paradox, however, was the fact that it took over three years to ratify the directive needed to implement the proclamation.

Three years? It’s too much.
The NBE has its own reason to delay the directive. I wish they could explain their justifications. The first draft states that Islamic banking must be practiced by Sharia compliant banks. It also gives options. The second one was, however, very surprising. It states that existing conventional banks can provide a full- fledged Islamic banking services, while new entrants shall not be allowed to do so.

So the final version of the directive states that Islamic banking shall only be given at window level in existing banks. There were nine private banks at the time, the rest of the nine banks were established afterwards. And there was a meeting held with the vice governor of NBE. The presidents of the commercial banks asked for more time to be given before allowing interest free banking service providers join the industry. They feared that their clients and resources will shift to Zamzam if we become operational. However, that was not a sufficient reason because the share of their Islamic clients represents a very small percentage of the total market size.

Finally after the directive was introduced, some people also threatened to kill us if we do not drop the idea of establishing an Islamic bank. At that moment, we have already collected ETB330 million from 6,800 subscribers. We had no choice, but to return the money to the shareholders or divert it to other investments. Some of the subscribers refused to take their money back because they were eagerly waiting for the establishment of the bank. There are some subscribers who still did not take their money because they hoped someday the bank will be realized.

Did not you appeal to the PM after the NBE introduced the directive which prevented you from opening the bank?
We wrote a letter to PM Meles, but he was sick and passed away shortly after. Then we appealed to PM Hailemariam Desalegn, but it bore no fruit. We raised the issue when Prime Minister Abiy Ahmed came to power, just two months after he took office. He then accepted our proposal.

Hopefully, Zamzam will start operations next year. But, the struggle to establish Zamzam was no different from a political struggle.

The NBE did not amend the 2011 directive so far, which does not allow full-fledged interest free banking. Then, how will the NBE regulate Zamzam?
We have to be a responsible bank. We are professionals; and want to contribute to the national economy. For several years, we have been consulting with banks engaged in interest free banking at a window level. The NBE also has been requesting for our expertise in many cases. We believe that we have to regulate our activities. Zamzam is not merely a bank; it’s bank plus. So NBE can treat the same way it treats the rest of the banks. We believe the role of banks is not only collecting deposits and lending; it’s about investing and creating more jobs. That’s how it contributes to the national economy.

There were only nine banks when you asked NBE for license; and none of these banks were proving interest free banking at the time. But today, there are 11 commercial banks that give interest free banking services at a window level.
Do you think the new Islamic banks that are under establishment will survive the competitions?
We have many new service models that have never been employed by any of the existing banks. Despite the existence of interest-free banking windows among the conventional banks, there is still unmet demand. The country lost so much because of the absence of Islamic banks. The issues of survival cannot be raised at this time because all the banks are really doing well.

Do you think Zamzam will be successful in short time?
Success in the banking industry depends on using the public money effectively and efficiently. There are 140 Islamic banking services approved by Sharia experts globally. However, only very few of them are provided in Ethiopia.

The national strategy must identify the type of financial services essential for our country. It is only when we operate in accordance with the priorities of the government that we will benefit.

Some of the existing banks in Ethiopia are established along ethnic lines. Many fear that the establishment of banks on the basis of religion will further exacerbate the division within the country.
That was our concern too. Islamic banks are not religious banks. They are principle-based business and professional banks. If you see the combination of our shareholders, not all of them are Muslims. Many scholars, including the late Wolday Amaha (PhD), were our advisors. I remember he once said that Islamic banking is a very useful idea in Ethiopia’s banking and microfinance sector. Wolday, who did a lot of research on financial industries, was among our non-muslim advisors and researchers.

Many other advisors in the finance industry were angry when Zamzam was denied the license to operate. These people were not Muslims; they just understood the merit of the bank. Some of our earlier subscribers were not Muslims.

In many countries, they list banks as Islamic, Catholic, and [Christian]. One cannot [keep] exploiting an industry and the country just because they have the privilege or because there is no strong regulator. According to Islamic principles, depositors are part of the bank and must benefit from the bank. It also mandates a bank to benefit from the depositors.

Islamic banks focus on project investment and property market. They are criticized for overlooking export, trade, and service sectors, which currently constitute a large portion of the country’s GDP. How will Zamzam respond to such situations?
Unlike the conventional banks, Islamic banking has products for every business item. There are designed Islamic bank products and services for financing agriculture, construction, service and other sectors. In the case of Zamzam, allocating for up to 15Pct of its capital for trade finance might be enough. As we revise our financing mix regularly, we can change the ratio up on assessment of the need.

Will you have special financing schemes?
We focus on investment and innovations. We also value soft assets like management. In our principle, collateral will not be the most important thing when we appraise projects for financing. Zamzam will finance [innovative] ideas without collateral.

How will you manage the shortage of skilled human resource?
We have many experts even at doctoral level of education with specialized expertise in e-commerce, e-trading, cyber security and online trading. We believe this is one of our competitive advantages. We will also continue investing to produce skilled labor in IT and finance. For instance, mobile banking is started in Ethiopia but the performance in the industry is not sufficient. We are developing apps and doing customizations to that end. It will allow customers to use various languages in Ethiopia; and additional mobile banking features, among others. Such research and development need compatibility with international standards, in addition to stressing on the security and vulnerability issues.

IT contributes immensely for sustainable economic growth. However, there are limitations in Ethiopia. Many IT colleges and consulting firms have even ceased operations. HiLCoE has still been in business and kept expanding.
How were you able to do that?
Upon establishment, HilCoE focused on the knowledge part of the service it provides. We started providing postgraduate courses in computer science by accepting students with undergraduate degrees in mathematics, statistics and physics. We succeeded in exporting a number of software and providing various consultancy services.

Many local banks buy software from overseas suppliers; is it because local suppliers are not qualified?
Most of the banking solutions in Ethiopia are implemented with our recommendations. Yet, most banks import the same software for millions of dollars, while it is easy to develop them locally.

Ethiopian banks pay huge amount of foreign currency to foreign suppliers as license fee, redesign expense and many other costs.
IT solutions for banking can be done locally. The problem is manufacturing the hardware locally. So far, local apparatus production is limited to mobile phone. Even that lacks local production and customization in apps and integration with the international applications. These days, over 60Pct of banks’ investment are in the IT Sector.

Additionally, purchasing software is not a plug and play business. It needs customization. We could have developed the software based on their needs from scratch, had the banks given us the opportunity. That is one of the reasons why we wanted to establish our own bank to finance such projects and contribute to the development of the IT sector as well.

You were the first to receive the ‘knowledge investor award’ in 2000 from the government. Many people identify you as the cofounder and owner of HilCoE. You are also widely recognized as the ‘father of interest free banking’ in Ethiopia.
How did you transform from being a college professor to becoming a banker?
Our college has been involved in developing and providing IT solutions for the financial industry, among others. The foreign IT firms provide even outdated IT solutions as new just with minor modifications, while it can be developed here. That is why we also pushed the government and submitted a proposal to the then investment agency to establish the ICT Park. The target of the proposal was to boost off-shoring, which involve developing and exporting software products, creating a dedicated software industry town in Ethiopia like Bangalore, India. Observing the gaps in Ethiopian financial industry, we strived to bridge it by supplying skilled human resources as well as developing solutions.

Be that as it may, although we wanted to get loan from the financial institutions, it was not possible. So we wanted to have our own bank that can finance our research and development projects. We were raised by families who taught us interest on money is haram, which is usury.

In a society under such stress, it is difficult to access finance from conventional banks, let alone deposit there.

Some of our friends even refuse gift from friends who work in conventional banks. We established the college as partnership luckily because we had families engaged in other business. So our question to establish interest free banking is logical. It is backed by rational interests.

There are several Sharia compliant banks under formation; do you plan to merge with them?
The history of Zamzam has been there since 2007. Nine conventional banks were established after our initiative. We have already 6800 subscribers and even elected board of directors before NBE denied us the license. So this is really a historic bank that has achieved its current status through a natural growth path.

So if there is a real and natural need for merger, we are open.

---

8th Year • July.16 – Aug.15 2019 • No. 76