Research Information System
Hitit Theology Journal, vol.22, no.1, pp.139-168, 2023 (ESCI)
The notion behind Islamic finance is providing alternative Shariah-compliant financial services and products for those who do not willingly access conventional finance as it contravenes Shariah principles. Currently, Islamic finance is expanding throughout Muslim and non-Muslim countries. One of the most critical challenges of the Islamic financial sector is the extent of the compliance of Islamic finance practices with Shariah principles. Therefore, there should be a control mechanism for ensuring the compliance of products and services provided by Islamic financial institutions with Shariah principles. Scholars argue that institutions engaged in Islamic finance should apply the Shariah governance framework in countries where Islamic finance is being practiced. The Shariah governance framework is mainly categorized into two main approaches: centralized and decentralized Shariah governance frameworks. The availability of a centralized Shariah governance framework is essential to ensure the application of Islamic finance in accordance with Shariah principles. Ethiopia is one of the countries that accommodated the application of Islamic finance through exclusively interest-free banking windows by conventional banks in 2011 and fully-fledged interest-free banks in late 2019. However, the National Bank of Ethiopia (NBE) did not specify any Shariah governance framework in its legislation. The unavailability of an established Shariah governance framework may expose the sector to the risk of Shariah non-compliance. This study investigates how to ensure compliance of Ethiopia’s Islamic finance applications with Shariah principles. Document studies and semi-structured interviews were conducted with 15 respondents, including experts in Islamic finance, Shariah scholars, and Islamic finance practitioners, to collect the needed data for this endeavor. The findings indicate that interest-free banks, especially interest-free banking windows, do not give the necessary attention to the issue of the Shariah governance framework. The presumed manifestations of Shariah compliance in Ethiopia are having a Shariah advisory committee, using Arabic words and names for their products and services, declaring they are following the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) standards, and participating in corporate social activities. However, these claims are insufficient to argue that their products and services are Shariah-compliant as long as an authorized external body oversees and controls their application. In addition, the results indicate that adapting the AAOIFI standards to the extent of industry development is recommended to ensure Shariah compliance in Ethiopia. Besides, considering responsible stakeholders in ensuring Shariah compliance, the government/NBE and financial institutions engaged in Islamic finance are identified as primary stakeholders. On the other hand, the Ethiopian Islamic Affairs Supreme Council (EIASC), religious scholars and institutional Shariah advisors, interest-free professional associations, academicians in Islamic economics and finance, and educational institutions are considered secondary stakeholders. In addition, the findings also indicate that the policymakers’ approaches of Türkiye, Malaysia, Kenya, and South Africa to the Islamic finance industry could be the best model for policymakers in Ethiopia. Establishing a centralized Shariah advisory committee under the NBE is recommended to ensure the compliance of interest-free finance applications with Shariah principles in Ethiopia. To this endeavor, all stakeholders such as government/NBE, financial institutions engaged in the Islamic finance industry, EIASC, religious scholars and institutional Shariah advisors, interest-free professional associations, academicians in Islamic economics and finance, and educational institutions should play a significant role by fulfilling their respective responsibilities.