Demystifying Regulatory and Shariah Governance of Interest-Free Finance in Ethiopia

1. Introduction

Interest-free finance, internationally known as Islamic finance, operates under Shariah principles that prohibit interest (riba), excessive uncertainty (gharar), and speculative practices, while emphasizing risk-sharing, asset-backing, and ethical investment. Over the past two decades, it has expanded globally, embraced by both Muslim and non-Muslim countries seeking financial diversification and inclusion (Hailu & Bushera, 2020).

Ethiopia provides a compelling case, with Muslims comprising roughly one-third of its 120 million citizens. For decades, demand for Shariah-compliant services remained unmet due to banking laws that excluded non-interest models. The turning point came with Proclamation No. 592/2008, which empowered the National Bank of Ethiopia (NBE) to regulate interest-free finance. This was operationalized in 2011 through Directive SBB/51/2011, permitting conventional banks to operate interest-free “windows.” A further liberalization in 2019 allowed fully fledged Islamic banks, leading to the establishment of ZamZam Bank in 2020, followed by Hijra, Ramis, and Shebelle, alongside dozens of windows within conventional banks (Hailu & Bushera, 2020).

Despite rapid growth, the sector outpaced regulatory and Shariah governance development. For more than a decade, Ethiopia lacked a comprehensive statutory framework and any NBE-mandated Shariah governance system, exposing institutions to compliance risks and fragmented oversight (Haılu & Tekdoğan, 2023). This paper therefore analyzes Ethiopia’s evolving regulatory framework, governance models, Shariah compliance mechanisms, and offers recommendations to strengthen the sector, drawing on proclamations, directives, academic literature, and industry reports as of mid-2026.

2. Regulatory Framework Governing Interest-Free Finance in Ethiopia

The statutory foundation for interest-free finance in Ethiopia began with Proclamation No. 592/2008, which authorized the National Bank of Ethiopia (NBE) to regulate non-interest-bearing deposit mobilization and financing (Hailu & Bushera, 2020). Acting on this authority, NBE issued Directive No. SBB/51/2011, permitting conventional banks to operate interest-free banking strictly through “windows.” These windows were required to maintain segregated funds, separate accounts, and monthly reporting. Institutions such as the Commercial Bank of Ethiopia and Oromia International Bank were among the first to adopt this model. However, the framework was criticized for its restrictive scope, lack of Shariah advisors, weak supervision, and limited public awareness, which constrained sectoral growth (Hailu & Bushera, 2020).

A major shift occurred with Proclamation No. 1159/2019, which explicitly recognized interest-free banks as stand-alone institutions. This was followed by Directive No. SBB/72/2019, outlining requirements for establishing fully fledged Islamic banks. ZamZam Bank, capitalized by over 11,000 shareholders, became Ethiopia’s first full-fledged interest-free bank in 2020, followed by Hijra, Ramis, and Shebelle Banks (Birr Metrics, 2026).

Consolidation came with Proclamation No. 1360/2024, which provided a comprehensive statutory framework for Islamic finance. It recognized key contracts such as Murabaha, Mudarabah, Musharakah, Ijarah, and Salam, mandated Shariah advisory boards, and affirmed NBE’s supervisory authority (5A Law Firm, 2026). Complementary directives, including SBB/94/2025 on foreign bank licensing and SBB/92/2024 on investment limitations, further strengthened governance while accommodating the distinct operating model of interest-free institutions (Afriwise, 2025; Addis Insight, 2024).

Despite progress, regulatory gaps persist. Islamic banks lack access to Shariah-compliant liquidity facilities, face double taxation on contracts like Murabaha, and are subject to uniform capital requirements that overlook their unique operational timelines. These challenges highlight that while Ethiopia’s framework has matured significantly since 2008, further calibration is needed to align regulation with the specific risk and operational characteristics of Islamic finance (Birr Metrics, 2026; Hailu & Bushera, 2020).

3. Governance Models Adopted by Interest-Free Financial Institutions

Ethiopia’s interest free finance sector has evolved around two institutional models: the window model and the fully-fledged institution model. The window model, pioneered by Oromia International Bank and later adopted by the Commercial Bank of Ethiopia, Hibret Bank, and others, integrates interest free operations within conventional banks. These windows maintain segregated funds and separate accounting records but remain nested within the parent bank’s governance structure. As a result, Shariah compliance is often treated as a secondary concern, with limited independence from conventional risk management and audit functions (Addis Fortune, 2024).

In contrast, fully-fledged interest free banks such as ZamZam, Hijra, Ramis, and Shebelle operate entirely on Shariah principles. ZamZam Bank raised over 1.6 billion birr in subscribed capital and structured its governance exclusively around interest free operations, with dedicated boards and management teams. Proponents argue this model embeds Shariah principles structurally, enabling more effective mobilization of deposits into Shariah-compliant financing. ZamZam reportedly invested about 75 percent of its deposits into financing in 2022/23, a higher ratio than many window operations (Birr Metrics, 2024).

A similar bifurcation exists in the insurance sector, where companies like Awash and Nyala introduced Shariah-compliant products through windows, mirroring the banking model. However, Ethiopia’s governance landscape remains fragmented, with each institution relying on its own committees. In 2024, the NBE directed banks and insurers to collaborate through the Ethiopian Bankers Association on establishing a national Shariah board to bring consistency to the sector. Stakeholders continue to debate whether such a body should hold supervisory or advisory authority, highlighting the transitional nature of Ethiopia’s governance framework (Addis Fortune, 2024).

4. Shariah Compliance and Governance Structures

Shariah governance refers to the institutional and regulatory mechanisms such as advisory boards, audit systems, and reporting lines through which interest free financial institutions ensure their operations comply with Islamic law. Scholars distinguish between centralized frameworks, where a national authority issues binding rulings, and decentralized frameworks, where each institution relies on its own Shariah board. Centralized systems are generally preferred because they reduce inconsistencies and provide authoritative guidance for regulators, customers, and courts (Haılu & Tekdoğan, 2023).

In Ethiopia, Shariah governance remained undefined until the enactment of Proclamation No. 1360/2024, despite the existence of interest-free banking windows since 2011 and fully fledged banks since 2019. Research indicates that this regulatory gap exposed institutions to Shariah non compliance risks, particularly in banking windows that gave limited attention to governance. Practices such as maintaining advisory committees, using Arabic terminology, or declaring adherence to Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), which establish principles for the composition, independence, transparency, and accountability of Shariah Supervisory Boards (SSBs) (IFSB, 2009; AAOIFI, 2015).

Institutional Shariah committees exist but lack uniform standards regarding composition, independence, and reporting lines, leading to inconsistent rulings. Ethiopia also faces a shortage of professionals trained in both Islamic jurisprudence and modern finance, constraining the rigor of Shariah review (5A Law Firm, 2026). Stakeholders include the NBE, financial institutions, the Ethiopian Islamic Affairs Supreme Council (EIASC), Shariah scholars, and academic bodies. While EIASC holds moral authority, it lacks regulatory power. Proclamation No. 1360/2024 now obliges institutions to maintain Shariah boards and affirms NBE’s supervisory role, though a national apex Shariah board with binding authority has yet to be established (Addis Fortune, 2024).

5. Conclusions

Ethiopia's interest-free finance sector has undergone a rapid and consequential regulatory evolution from the restrictive window-only model authorized under Directive SBB/51/2011, to the liberalization of fully-fledged Islamic banking under Directive SBB/72/2019, to the statutory consolidation achieved through the Banking Business Proclamation No. 1360/2024. This trajectory reflects a genuine and accelerating institutional commitment to accommodating Shariah-compliant finance within Ethiopia's broader financial system. However, the governance architecture supporting this growth remains structurally underdeveloped relative to the standards applied in more mature Islamic finance jurisdictions.

Shariah oversight is fragmented across institution-level boards operating without a binding national reference standard, qualification requirements for Shariah scholars remain undefined, independent Shariah audit is not systematically required, and the sector continues to face unresolved tax, liquidity, and capital-market constraints that limit both its competitiveness and its governance coherence. Addressing these gaps through the establishment of a national Shariah advisory board, adoption of AAOIFI and IFSB standards, tax reform, Shariah-compliant liquidity instruments, and sustained investment in Shariah governance capacity represents the critical next phase in the maturation of Ethiopia's interest-free finance sector, with significant implications for financial inclusion among Ethiopia's substantial Muslim population and for the sector's long-term stability and credibility.

6. Recommendations for Shariah Governance Framework

Based on the preceding analysis and drawing on comparative practice in jurisdictions that have institutionalized Shariah governance more comprehensively, the following recommendations are proposed for strengthening Ethiopia's Shariah governance framework.

• The National Bank of Ethiopia (NBE) should establish a National Shariah Advisory Board to harmonize Shariah rulings and ensure consistency across interest-free financial institutions. The regulatory framework should formally adopt internationally recognized Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), Shariah governance standards, while requiring independent Shariah audits to enhance transparency, accountability, and public confidence.
• Tax regulations should be revised to eliminate the double taxation of Islamic finance contracts and create a level playing field with conventional banking. In addition, the NBE should develop Shariah-compliant liquidity management and interbank money market instruments to strengthen liquidity risk management and financial stability. The development of Islamic capital market instruments, including Sukuk, should be prioritized to diversify funding sources and support the growth of the interest-free finance industry.
• Furthermore, universities, professional associations, and regulators should collaborate to build the capacity of Shariah scholars and Islamic finance professionals through specialized education and certification programs.
• Finally, greater stakeholder participation, including religious institutions, academia, and industry associations, should be encouraged to enhance the legitimacy, consistency, and sustainability of Shariah governance in Ethiopia. Collectively, these measures would align Ethiopia's interest-free finance industry with international best practices while addressing the country's unique legal, institutional, and market conditions.