Sharia-compliant finance boosts financial inclusion in Ethiopia, but a fully-fledged Islamic banking has yet to take root.
By Elias Gebreselassie (Al Jazeera)
ADDIS ABABA–It’s afternoon in Addis Ababa’s bustling Bole Michael district, and businesswoman Hukun Aden Mohammed is doing a brisk trade.
The 45-year-old, single mother of seven opened her modest cosmetics and snack shop in the heavily ethnic Somali neighborhood two years ago.
Business is so good, she’s planning to grow and diversify.
“I plan to expand my business by opening up a shoe store,” Mohammed told Al Jazeera. “Inshallah (God willing) I also plan to open businesses in my home city, Jijiga in Somali regional state and across other parts of Ethiopia.”
Ten years ago, Mohammad, an observant Muslim, would have struggled to find funding that aligned with her religious beliefs.
But Ethiopia‘s measured embrace of Islamic banking is offering her and other entrepreneurial-minded Muslims a gateway to financial inclusion.
She started her business with a loan from the Somali Microfinance Institution (SMFI), Ethiopia’s first provider of sharia-compliant microfinance services.
“I first received around 7,000 Ethiopian bir ($246) loan from SMFI and with my business successfully expanding, I have recently received a loan of around 75,000 Ethiopian Birr ($2,645),” said Mohammed.
Unlike conventional finance, sharia-compliant financial institutions do not charge interest on loans. Instead, they share in any potential profits or losses of the businesses they underwrite.
They also refrain from lending to businesses that engage in or promote activities prohibited under Islamic law, such as gambling, or selling pork or alcohol, or selling services that promote “immorality.”
The vast majority of SMFI’s loans are structured as resale agreements known as Murabaha, where the bank purchases goods for its client and then sells the goods back to them at a slightly higher price than the original cost. The customer can then repay the loan in installments.
For Mohammad, Islamic banking services have transformed her financial life.
“The loans from Somali Microfinance Institution have already allowed me to support the needs of my children, pay for my accommodation and business rent,” she said. “With future loans from SMFI, I plan to buy house or land to expand my business and build a stable home for me and my family.”
Read the complete story at Al Jazeera English