The role of Islamic finance in reduction of financial exclusion in Ethiopia

This research investigates the role of Islamic finance in combating financial exclusion in Ethiopia. It intends to assess the extent and the nature of religious driven financial exclusion of Ethiopian Muslims and the level of their participation in the existing interest free window banking system introduced to the sector recently. In order to collect data for the research, the researcher employed mixed approaches such as questionnaires and semi-structured interviews. The questionnaire was distributed to 321 respondents in Addis Ababa while the semi-structured interview was conducted with selected high-ranking bank officers. Findings show that, 94.4%, 87.2% and 69.2% of the respondents did not have access to credit, micro finance and insurance respectively. Additionally, 62.9% of respondents reported to have never used home financing such as condominium housing program. Religion was found to be the main factor for not accessing conventional financial services. Further, the research also found that 67.9% of respondents did not access interest free banking window products and services offered by conventional banks. This finding potentially implies the failure of the newly introduced interest free window in enhancing the inclusion of Ethiopian Muslims in the financial system. The absence of full-fledged Sharia compliant financial institution in Ethiopia considerably contributed to the exclusion of Ethiopian Muslims in the country's economy. It is, therefore, an overdue task for Ethiopian government to accommodate the interest of its Muslim population in the financial system. This includes, but not limited to, the establishment of full-fledged interest free financial institutions, including interest free bank, insurance and microfinance institutions. Keywords: Religious driven financial exclusion, Islamic finance, interest free window banking, full-fledged interest free finance.