Interest-Free Microfinance Regulation And Supervisory Framework: Comparative Study

Abstract

Interest-free microfinance is Shari’ah-based approach to poverty alleviation and financial inclusion for the poor and unprivileged member of the society. Furthermore, it is regarded as an alternative means for people have been excluded from the conventional microfinance for the religious reason. Ethiopia has been actively working for financial inclusion for over a decade. One of the areas of this financial inclusion policy of the country focuses on the inclusion of Muslims’ interest in the financial institutions, which commenced with permission given for interest-free banking, followed by Islamic insurance and now interest-free microfinance. After the recognition of interest-free microfinance by microfinance business(as amended) in proclamation No. 1164/2019, the NBE also issued a directive in order to provide additional condition for licensing and authorization. Thus, the purpose of this study is to analyze the interest-free microfinance regulation in Ethiopia in line with Islamic perspectives. By using comparative and empirical research method, the study has found gaps in the interest-free microfinance regulatory and supervisory framework of Ethiopia regarding Shari’ah compliance and prudential regulation. Moreover, the researcher identified that the supervisory authority is not equipped for the proper supervision of interest free microfinance. Finally, the researcher proposed that the legal, regulatory and supervisory framework of interest-free microfinance be genuine, credible and successful in addressing societal issues