Assessment on Practical Challenges and Opportunities of Islamic

Banking in Ethiopia: In case Hijra Bank S.C

A THESIS SUBMITTED TO ST. MERY’S UNIVERSITY SCHOOL OF

GRADGUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUAIMENTS
FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION IN
ACCOUNTING AND FINANCE.

BY: MUNA SULTAN

JUNE, 2023

ADDIS ABABA ETHIOPAI

i
Assessment on Practical Challenges and Opportunities of Islamic
Banking in Ethiopia: In case Hijra Bank S.C

A THESIS SUBMITTED TO ST. MERY’S UNIVERSITY SCHOOL OF

GRADGUATE STUDIES IN PARTIAL FULFILMENT OF THE REQUAIMENTS
FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION IN
ACCOUNTING AND FINANCE.

BY: MUNA SULTAN

ADVISOR: MUHAMMED SEID (ASST.PROFESOR)

JUNE 2023

ADDIS ABABA ETHIOPAI

ii
 ST. MARY’S UNIVERSITY

SCHOOL OF GRADGUATE STUDIES

MBA IN ACCOUNTING AND FINANCE

BY

MUNA SULTAN

Approved by Board of Examiners

Dean, graduate studies Signature Date

_____________________ ____________ ________________

Advisor Signature Date

______________________ _____________ ______________

Internal Examiner Signature Date

_____________________ _____________ _________ _____

External Examiner Signature Date

_____________________ _____________ ______________

iii
 ENDORSMENT

This thesis has been submitted to St. Mary’s University, School of Graduate Studies for

examination with my approval as a university advisor.

_______________________________ _________________

Muhammed Seid (Asst. Prof.) Signature & Date

iv
 Declaration

I, Muna Sultan, do hereby declare that this thesis is my original work and have never been
submitted partially or fully by any person to any institution and that all source of materials
used for this thesis have been properly acknowledge.

Submitted By:

Full Name: Muna Sultan

Signature: _________________ Date: ________________

Approved By:

This thesis has been submitted for examination with my approval

Full Name: Muhammed Seid (Asst. Prof.)

Signature: _________________ Date: ________________

v
 Acknowledgment

All praise be to the almighty Allah (may he be praised and exalted) the most gracious the
most merciful, without him there is nothing to be done. with the help of him I can recover
from my tough time of health disorder and I was able to complete my work Alhamdulillah.

My deepest gratitude goes to my parents Sultan Shifa Amdyihun and Muhaba Oumer Muktar,
the most precious gifts from Allah, they gave me all they had which can’t be measured and
replaced. Their prayer is always right behind me for every success of my life. may Allah
reward them with his countless and highest blessings, May Allah prize them paradise.

My special thanks also extend to my Advisor Asst. Prof. Muhammad Seid for his permanent
support, encouragement and fruitful guidance during the entire work of this study.

I gratefully acknowledge my employer Mr. Kemal Bejiga for his advice and encouragement.
Who permits my precious working time (the time I can’t exchange with money) at the
organization to be devoted for my study.

Finally I would like to thank Mr.Husien Aman the Director of branches operation at Hijra
Bank S.C for his volunteer to forward the relevant data for this paper and I would like to
appreciate all participants of this paper for the time they devote to help me.

Thank you all indeed!

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Table of Contents
Acknowledgment ................................................................................................................................... vi

Abstract ................................................................................................................................................... x

CHAPTER ONE ......................................................................................................................................... 1

1. INTRODUCTION ............................................................................................................................... 1

1.1 Background of the Study ......................................................................................................... 1

1.2 Statement of Problem ............................................................................................................. 3

1.3 Objective of the Study ............................................................................................................ 5

1.3.1 General Objective ........................................................................................................... 5

1.3.2 Specific Objectives .......................................................................................................... 5

1.4 Research Questions ................................................................................................................ 5

1.5 Significance of the study ......................................................................................................... 6

1.6 Scope of the study .................................................................................................................. 6

1.7 Limitation of the study ............................................................................................................ 6

1.8 Structure of the Paper ............................................................................................................ 7

CHAPTER TWO ........................................................................................................................................ 8

2 LITERATURE REVIEW ....................................................................................................................... 8

2.1 Introduction ............................................................................................................................ 8

2.2 Theoretical review .................................................................................................................. 8

2.2.1 Prohibition of Riba (Interest/usury) ................................................................................ 9

2.2.2 Prohibition of Gharar (uncertain dealings) ................................................................... 10

2.2.3 Prohibition of maysir or Qimar (Speculation behaviour): -........................................... 10

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 2.2.4 Profit and Lose Sharing ................................................................................................. 10

2.2.5 Financial Inclusion ......................................................................................................... 11

2.2.6 Prohibition of harmful Products ................................................................................... 11

2.2.7 Sanctity of contracts and the preservation of property rights ..................................... 11

2.2.8 Ethics and Social Responsibility .................................................................................... 12

2.2.9 Payment of Zakat .......................................................................................................... 12

2.2.10 Conformity with Sharia Law .......................................................................................... 12

2.2.11 Sustainability on banking Industry ................................................................................ 13

2.2.12 Practical Opportunities of Islamic Banking ................................................................... 16

2.2.13 Practical Challenges of Islamic Banking ........................................................................ 17

2.3 Empirical Review on Sustainability of Islamic Banking ......................................................... 22

2.4 Research Gap ........................................................................................................................ 25

Chapter Three ....................................................................................................................................... 27

3 Research Methodology ................................................................................................................. 27

3.1 Research Design .................................................................................................................... 27

3.2 Research Approach ............................................................................................................... 27

3.3 Source of Data....................................................................................................................... 27

3.4 Data collection tools ............................................................................................................. 28

3.5 Population ............................................................................................................................. 28

3.6 Sample Size ........................................................................................................................... 30

3.7 Data Analysis ......................................................................................................................... 30

CHAPTER FOUR ..................................................................................................................................... 31

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4 DATA PRESENTATION AND DISCUSSION....................................................................................... 31

4.1 Introductions ......................................................................................................................... 31

4.2 Practical Opportunities impact on the sustainability of Islamic Banking ............................. 31

4.2.1 The Ability to grow potential market share .................................................................. 32

4.2.2 Availability of substantial amount of customers .......................................................... 33

4.2.3 Way of affordable access to small medium and micro enterprises.............................. 34

4.3 Practical challenges impact on the sustainability of Islamic Banking ................................... 37

4.3.1 Lack of Legal and regulatory frame work specific to Islamic bank ............................... 37

4.3.2 Lack of Public Awareness .............................................................................................. 39

4.3.3 Lack of Committed Entrepreneur ................................................................................. 42

4.3.4 Lack of Skilled Human Resource ................................................................................... 43

4.3.5 Lack of Risk Management Framework .......................................................................... 44

CHAPTER FIVE ....................................................................................................................................... 47

5 SUMMERY, CONCLUSION AND RECOMMENDATION ................................................................... 47

5.1 Summery ............................................................................................................................... 47

5.2 Conclusion ............................................................................................................................. 48

5.3 Recommendations ................................................................................................................ 50

Reference .............................................................................................................................................. 51

Websites ............................................................................................................................................... 56

APPENDIX .......................................................................................................................................... 57

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 Abstract

The topic of this paper is assessment of practical challenges and opportunities of Islamic
banking in Ethiopia in case of Hijra bank S.C. The objective of this paper is to make an
assessment on practical challenges and opportunities impact on the sustainability of Islamic
banking. In order to do so, the researcher employed descriptive research design method. This
thesis also applied qualitative research approach to accomplish the purpose of the study.
Closed ended Questionnaire and semi-structured interview were utilized. The target
respondents for the study were managers of different department at head quarter and also
branch managers and supervisors of Hijra bank S.C. Total Number of the population for the
study were 80. Purposive Sampling technique was used to investigate the entire population.
Statistical package for social science (SPSS) used to analyse the data collected. Among 80
distributed questionnaires, 73 were completely filled and returned which have 91.25%
response rate. The result of the study reveals that potential market share and availability of
customers are practical opportunities for the sustainability of Islamic banking. Islamic banks
can capture potential opportunity in financing SMEs for future sustainability. The findings of
this study also indicate that there are practical challenges which harm the sustainability of
Islamic banking. The major recommendations forwarded by the researcher are regulatory
bodies should modify the current interest-based rules and regulations specific for Islamic
banking and also Islamic banks should promote and create awareness about Islamic banking
to the public. This can able Islamic banks to compete globally and sustainable on the banking
industry.

Key Words: Challenge, Islamic banking, Opportunities, Sharia complaint, Sustainability

x
 CHAPTER ONE
1. INTRODUCTION
1.1 Background of the Study

Banking industry has an important role in economic development of a country through

facilitation of business. They Play vital role in financial dealings and provide clients with
variety of services as they are a means for financial intermediation. The Bank system
facilitates local and global trade. The Global financial market is dominated by conventional
banking system. Islamic banking is another system of financial intermediation which strictly
adheres to the principles of sharia law which is a complete set of rules that manifest the
holistic idea of Islam. Islamic finance is an old financing style or system and it was reborn
again in 1970s, since then it has been increasing year after year (Nobanee, 2020).

There were traditional, cultural and social challenges in accepting the idea of Islamic finance
and banking even if it was practiced broadly till several Muslim Countries were under
colonial rule. During the colonial period, these Muslim societies to varying degrees lost touch
with their old traditions, values and cultural heritage. It was only after the end of the colonial
period that Muslims began to re-discover their identities and manifest the desire to regain the
lost values in all aspects of life, especially in the economic sphere (Iqbal, 2011).

Because of trade and commerce linked always to Islam, making international business
without the help of banking facility is not possible. The main reason for the introduction of
Islamic finance in Ethiopia is to give a practical response to the global growth of Islamic
finance and to attract foreign investors from (wealthy) Muslim majority countries. Similarly,
development of IFB was aimed at responding to the strong demand of Muslims to engage in
faith-based finance (Ahmed,2021).

Now a day, the growth of Islamic Banking over the globe moves with high speed. Islamic
banking not only restricted in Muslim dominated countries rather in non-Muslim countries
like United Kingdom, Luxembourg, South Africa, Hong Kong has a surge of interest in
Islamic finance. Eminent economists who lived through the period 1929-33 fought to
establish a banking system capable of preserving long term financial stability. Although they
were unaware of Islamic finance and its principles, their proposals were a natural restatement
of some of the basic pillars of Islamic finance (Iqbal, 2011). Sustained performance of

1
Islamic finance industry during the global financial crisis of 2008 has attracted increased
attention on Islamic way of banking (Nawaz, 2016).

Sustainability is about ensuring long term business successes, while contributing toward
economic and social development, a healthy environment and a stable society. Sustainable
finance is defined as the provision of financial capital and risk management products to
projects and business that promote, or do not harm economic prosperity, environmental
protection and social justice (Parvez, 2015).

Sustainability can be looked into in three dimensions: social dimension, economic dimension,
and environmental dimension. sustainability considers social and environmental factors when
making loan decisions; it assures, transparency good governance, and integrity; it upholds the
protection of the environment; it sets resource efficiency, and it promotes financial help
through assisting enterprises. Sustainability is a value philosophy which states that a bank's
business activities must benefit its employees, shareholders, customers, and the economy
while also conserving the natural environment. The need for sustainability is actuated by the
role of financial institutions in development (Nobanee, 2021).

Jan et al (2018). states that Sustainability in Business field refers to the process by which
companies manage their economic, social and environmental risks, obligations and
opportunities. These three impacts are sometimes referred to as profit, people and planet.

It has high potentials to contribute towards sustainable financing ecosystem for the green
world. Islam primarily promotes the preservation of natural resources and the need to respect
all living things regarding the relationship between humankind and the environment (Uddin,
2018).

This study investigates the sustainability of Islamic banking at Hijra bank S.C. Specifically,
practical challenges and opportunities which has an impact on the sustainability of Islamic
banking. Hijra Bank was established on January 16, 2022 in the wake of long-awaited
government’s approval of fully-fledged interest free banking in Ethiopia. It is one of the few
banks in Ethiopia with certified Omni-channel digital banking solution (mobile banking,
internet banking, USSD and ATM). Hijra bank’s core banking system is acquired from the
first and only AAOIFI (Accounting and Auditing Organization for Islamic Financial
Institutions) -certified Sharia-compliant software solutions: iMAL. Hijra bank offer core
service of Islamic Banking which are Murabaha financing Mudarabah & Musharekah,
Wakala, Istisna and Haremeyin (Home - Hijra Bank (hijra-bank.com)).

2
1.2 Statement of Problem

Provision of High-quality Islamic finance service can capture high demand among Muslims
as well as non-Muslim. Economic globalization has led to the flourishment of Islamic
banking both in Muslim and non-Muslim countries (Ahmed,2019). As a financial business
sector, Islamic banking aims to maximize wealth to shareholders besides keeping morals and
values of the society and provide better service to their clients. Islamic banking can supply its
product with a safe and sound manner by applying an opportunity specific to Islamic banking
which are not available in conventional banking service. Islamic banks must think
strategically by providing high quality products and services quick changes of technology to
satisfy their customer as well as to face the strong competition with conventional banks.
(Abdulqawi, 2011).

To carry out Islamic finance in a responsible and ethical manner as well as to render
economic, social and environmental advantage to its customers permanently, there should be
sustainable development on the sector to ensure long term business success. The
sustainability development of Islamic finance offers benefits for economic growth, reducing
poverty and fostering shared prosperity (The world bank, 2015).

In response to the long-standing demand of Ethiopian Muslims, the government introduce

interest free banking in 2011 by enacting two directives: the directive to Authorize the
business of interest free banking No. SBB/51/2011; and the directive to license and Authorize
interest free banking Business No. SBB/72/2019. Although these directives Oblige the
application of Islamic laws for interest free banking transactions (Ahmed, 2021). ZamZam
bank, the first Islamic bank has officially received a licence from National Bank of Ethiopia
(NBE), the country’s banking regulator, on 12th Oct 2020 to specifically offer financial
service and products that comply with Islamic law (IM Insights, 2020). Hijra, Zad second and
third formed Islamic banks respectively.

It doesn’t mean that to penetrate into the market is to be successful and sustainable in the
market. There must be competitive advantages through differentiation which able the
business to become sustainable. Because of their intermediation function between depositors
and borrowers, banking Industry Holds a unique position with regard to sustainable
development (Parvez, 2015).

3
The construction of a composite sustainability index includes the economic, environmental
and social dimension of entrepreneurship. Each of the three sub-indices is a synthesis of
several key performance indicators, which are usually the subjects of annual sustainability
reports of an organization. A key tool to achieve sustainability in the banking sector is to
analyse the corporate performance of the organization. This will give a competitive
advantage to the bank Operators (Stauropoulou, 2019).

Failure of banking industry is not a threat only toward the deterioration of country’s economy
performance and growth but it is additionally a threat to the international financial and
economic development (Marimuthu, 2015). In current banking industry Islamic and
conventional banks are weighted as two rivals alongside in many Muslims and even in non-
Muslim lands. Maintaining strong sustainability is vital to the existence profile of both the
parties. Even if the rapid growth of Islamic banking industry all over the world is shed the
future light generally, each countries contribution over the sector is major role on the
sustainability of the development and to meet its long-term mission. Islamic bank must
outstand sustainable and resilience to be competitive with conventional banks.

Sustainability needs Islamic financing concepts in order to be achieved. Otherwise, the

development will be for a certain period not constantly growing (Nobanee, 2020). There are
many factors which have an Impact on the sustainability of Islamic banking and to remain
competitive with conventional banks. Risk Sharing feature of Islamic Banking is protective
comparative advantage among conventional banks, incentives of Islamic banking for the
conservative share holders’ responsibility on negligence and misconduct, encourage
investment on small micro and medium enterprises (SMEs), Difficulty in accessing liquidity,
lack of regulatory framework for Islamic banking, limitation from central bank on not to
practice all Islamic finance instruments are some of practical opportunities and challenges
which have positive and negative impact on the sustainability of Islamic banking industry.

Newly established Islamic banks in Ethiopia need to move forward with efficient
performance and sustainable development to meet their Objectives and contribute continual
economic, social and environmental benefit to the country. In this study the researcher will
make an assessment on some practical challenges and opportunities that have an impact on
the sustainability of Islamic banking. Potential market share, way of affordable access to
small and medium and micro enterprises, lack of Islamic banking regulatory framework,
public awareness, skilled human resource and Risk management framework are selected as

4
independent factors. On the other side the sustainability of Islamic banking as dependent
variable.

Numerous researches on the sustainability of Islamic banking have been studied in many
countries’ context (Jan and Marimuthu (2015), Siswanti (2017), Siswanti et al (2017), Jan et
al. (2018), Bayzid and Nobanee (2020), Nor, S. M. and Hashim, N. A. (2015) and along with
doctoral dissertation on the sustainability of Islamic Banks: A theoretical and Empirical
Analysis (Ayachi, R.A. (2017). However, from my observation no research has been carried
out on the practical challenges and opportunities impact on the sustainability of Islamic
banking before in Ethiopia context. As Islamic banking is young for the banking industry,
this study area helps Islamic banks to maintain their financial process over a long time. The
researcher tries to fill the gap by determining Practical challenges and opportunities that has
an impact on the sustainability of Islamic banking at Hijra Bank S.C.

1.3 Objective of the Study

Commonly research objectives are classified into General objective and specific Objective.

1.3.1 General Objective

The General Objective of the study is to assess practical challenges and opportunities which
have an impact on the sustainability of Islamic banking under the practice of Hijra Bank S.C.
To attain the main objective, the following specific objectives are set;

1.3.2 Specific Objectives

In line with the above general objective, the following specific objectives were specified

➢ Assessment of practical challenges of Hijira Bank S.C

➢ Assessment on practical opportunities of Hijira Bank S.C

1.4 Research Questions

In order to accomplish the intended Objective and to address the research problem the
researcher attempt to find response to the following questions.

➢ What are the main practical opportunities which have an impact on the sustainability
of Islamic banking?
➢ What are the main practical challenges which affect the sustainability of Islamic
banking?

5
1.5 Significance of the study

An assessment of Hijra bank’s experience on the sustainability of Islamic banking, the study
will give clue for the rest newly implemented Islamic banks on how to remain sustainable on
the Islamic finance sector, how to use comparative advantages appropriately and
strategically. This practical experience assess in this paper helps Islamic banks in Ethiopia to
take attention on which challenges and opportunities affect sustainability of the sector as well
as to understand that sustainable development on the sector will meet the goal of Islamic
banking and will give competitive advantage over conventional banks. In addition, this paper
would facilitate the decision of policy makers. It would be useful to show policy makers to
avoid the treatment of Islamic banks with the same rules and regulations to conventional
banks and issuing separate law and regulation will help Islamic banks to be sustainable on the
sector and contribute benefit on the overall economy of a country. Islamic banks differ
essentially and spiritually from conventional one. Thereby, similar treatment with
conventional banks can keep Islamic banks back from moving forward with required speed.

Moreover, due to the absence of research on this topic in Ethiopia, the Study seems to carry
an enormous academic value on the area. As well, it will lead MS students to continue
investigation with wide range from where the researcher left over or eliminate the mistakes.

1.6 Scope of the study

The study area is Hijra bank located at Addis Ababa. It takes employees and managers of the
bank they have experience on Islamic banking as survey participants. The study will
comprise data collected from participants through the use of well-structured questionnaires
that will be distributed and administered to them and by making an unstructured interview to
managers and Sharia Supervisory board members.

1.7 Limitation of the study

To obtain relevant data to the study is inaccessible because of they are recent. The study will
have fruitful result if the selected study area has operational experience for a long period of
time, but they don’t have adequate operational experience on this short time. This limitation
obliges the researcher to make the study using the available data. The absence of study on the
topic in Ethiopia context as well as shortage of adequate research abroad the country restricts
the researcher to make enough investigation. Thereby, this research will be employed with
available data.

6
1.8 Structure of the Paper

The paper proceeds as follows. The first chapter is Introduction, which contain Background
of the study, statement of problem, objective of the study, research questions, significant of
the study, scope and limitation of the study and Structure of the paper. The second chapter
address related literature on the sustainability of Islamic banking and banking industry.
Research methodology is described in chapter three. The data collected will present and
analysed on chapter four. Finally, conclusion of the study and recommendation of the
researcher is highlight in chapter five.

7
 CHAPTER TWO

2 LITERATURE REVIEW

2.1 Introduction

This chapter attempt to review and discuss related documents and findings that are related
with banking sustainability to intensify and improve the research. The literature concerning
about the sustainability of Islamic banking will be presented. The relevant literature will be
collected from secondary data.

2.2 Theoretical review

In order to be justified Islamic, the banking system has to avoid Riba (Interest).
Consequently, much of the literature on theory of Islamic banking has grown out of concern
that how monetary and banking system would function if interest is abolished by law (Islamic
markets).

Islamic banks have similar purpose as conventional banking except that it operates in
accordance with the rules of Sharia. Conventional banks intermediation is debt-based and risk
transfer while Islamic banking asset-based and risk sharing. Conventional bank products were
no way near to the principle of Islamic as the conventional banking products rotate the
earning of interest (Riba) which is clearly prohibited in Islam. Islamic banking levy profit
rate instead interest rate. Islamic finance is Equity-based, asset-backed, ethical, sustainable,
environmentally and socially responsible finance. The basic principles of Islamic banking are
the sharing of profit and Loss (PLS), the prohibition of Riba (interest), Gharar (uncertainty),
maiser (gambling) and non-Halal (prohibited activities) (Rexhepi, 2017). Islamic banking is
an ethical and socially responsible banking which is dedicated to human being and society
with no adverse effect on the environment. It can play a supportive role in improving the
environment for sustainable development.

Islamic Banking System has specific features and characteristics adheres to sharia law which
is distinct from conventional banking system. These features are basic principles and major
criteria they used as a competitive advantage for Islamic banking system. Shariah-compliance
is a unique feature of Islamic Bank and is key to help ensure the integrity of Islamic Banks
Mejia et al. (2014).

8
2.2.1 Prohibition of Riba (Interest/usury)

Key principle of Islamic finance is the prohibition on paying or receiving (Riba), Which is
interpreted to mean all forms of interest and is not limited to Usury or excessive interest only.
prohibition of Interest is rooted in the notion that money is to be used as a medium of
exchange but is not itself a commodity (The world bank, 2021). This Prohibition is based on
arguments of social justice, equality, and property rights. Islam encourages the earning of
Profits but forbids the charging of interest because profit determine Ex-post, symbolize
successful entrepreneurship and the creation of additional wealth. By contrast, Interest,
determines Ex-ante, is a cost that is accrued irrespective or the outcome of business
operations and may not create wealth if there are business losses. Social justice demands that
borrowers and lenders share rewards as well as losses in an equitable fashion and that the
process of wealth accumulation and distribution in the economy be fair and representative or
true productivity (Iqbal, 2011).

Allah the Almighty God Ordered in the Qur’an not to take or give Interest (Riba).

‘’And whatever you give for interest [i.e., advantage] to increase within the wealth of people
will not increase with Allah. But what you give in Zakah (charity), desiring the countenance
[i.e., approval] of Allah those are the multipliers (Holly Quran, 30:39).

‘’those who consume interest cannot stand [on the day of resurrection] except as one stands
who is being beaten by Satan into insanity. That is because they say ‘’ Trade is [just] like
interest.’’ But Allah has permitted trade and has forbidden interest. So, whoever has received
an admonition from his lord and desist may have what is past, and his affair rests with Allah.
But whoever returns [to dealing in interest or usury] – those are the companions of the fire.
They will abide eternally therein (Holly Quran, 2:275).

Conventional financing assumes that the banks and financial institutions deal in money and
monetary papers only. That is why they are forbidden, in most countries, from trading in
goods and accumulating inventories. Islamic finance, on the other hand, does not recognize
money as the subject matter of trade, except in some special instances. Money has no
fundamental utility; it is only a medium of exchange (Reille, 2016).

Islamic economists have argued for the adoption of a profit rate, rather than an interest rate.
The most critical and significant implication of banning interest is the indirect prohibition of
a ‘’pure’’ debt security. The key point to bear in mind is that Islamic law doesn’t recognize

9
money and money instruments as a commodity but merely as a medium of exchange (the
world bank, 2015).

‘’The most hated sort, and with the greatest reason, is usury, which makes a gain out of
money itself, and not from the natural object of it. For money was intended to be used in
exchange, but not to increase at interest. And this term interest, which means the birth of
money from money, is applied to the breeding of money because the offspring resembles the
parent. Wherefore of an modes of getting wealth this is the most Unnatural’’ (Aristotle).

2.2.2 Prohibition of Gharar (uncertain dealings)

Gharar means taking excessive risk or having unnecessary uncertainty in a deal. In Islam all
aspect of the deal must to be transparent and known to all parties which significantly reduces
conflicts between them (www.course Hero.com).

2.2.3 Prohibition of maysir or Qimar (Speculation behaviour): -

Islamic laws forbid to investment in the haram business, such as gambling. This is because in
such trade practices the elements of free and fair exchange of goods and services is not
observed, and rather are based on deceit and dishonesty (Jan, et al 2021).

The primary difference between Islamic banking system and conventional banks is that
Islamic banking forbids usury and speculation. An Islamic financial system discourages
hoarding and Prohibition transactions extreme uncertainty, gambling and risk (Iqbal, 2011).

2.2.4 Profit and Lose Sharing

Because interest is prohibited, Pure debt security is eliminated from the system and therefore
suppliers of funds become investors, rather than creditors. The provider of financial capital
and the entrepreneur share business risks in return for shares of the profit and losses (Iqbal,
2011). Risk sharing has the potential of ensuring economic growth with financial stability,
and promoting financial inclusion through the fostering of entrepreneurship opportunities for
all segments of society (Maghrebi, 2015)

As noted by Maghrebi (2015), Economic prosperity should be pursued through risk-sharing

rather than at the expense of consumer loans and microcredit schemes that perpetuate the
cycle of hand-to-mouth consumption and indebtedness.

10
Islamic finance has the concept of Risk Sharing and it provides tools to protect the wellbeing
of the individual since it is driven by the rule of Sharia law, it will take in consideration the
rights and objectives of everyone in the society (Nobanee,2020). According to Nobanee
(2020), The concept of risk sharing in Islamic Finance is very crucial in developing society as
a whole and reduce the gap between the poverty and the wealth level through either raise or
fall together.

Hassen, (2018) states that the risk sharing system of Islamic banking and finance contributes
to sustainable development by funding the untapped opportunities in emerging and
developing countries that cover most of the world.

2.2.5 Financial Inclusion

Financial inclusion is the provision of available and affordable access to financial service for
everyone regardless of their level of income. It applies to provide service to both individuals
and business. Financial Inclusion has become an increasingly important concern for vast
number of countries worldwide. It plays an important role in driving away the poverty from
the country. Financial Inclusion is the process of ensuring financial service to the weaker
section of the society at affordable cost (Nazar, 2017). Financial inclusion has proven to be
linked to desirable economic outcomes above and beyond those associated with the more
familiar concept of financial depth. At the micro level, several studies show evidence that
access to savings accounts at the local level produces benefits to the directly affected
population by increasing savings, investment, consumption, or income (Naceur,2015).

2.2.6 Prohibition of harmful Products

Mutual benefit relationship between people is encouraged in Islam. Allah command that
exchanging goods and services should be done via transaction such as buying and selling
because it enables our economy to run more efficiently and encourage people to be more
industrious. Trading Goods Which are normally used to commit or encourage sin is
forbidden. Permitting the sale or trade of such articles implies promoting and propagating
them among people and consequently encourage them to do what is forbidden.

2.2.7 Sanctity of contracts and the preservation of property rights

Islam upholds contractual obligations and the disclosure of information as a sacred duty. This
feature is intended to reduce the risk of asymmetric information and moral hazard. Islam
places great importance on the preservation of property rights, defines a balance between the

11
rights of individuals, society and the state, and strongly prohibits encroachment on anyone’s
property rights (Iqbal, 2011).

2.2.8 Ethics and Social Responsibility

It is Known that the Economic responsibility of all companies is to offer goods and services.
So, they can earn as much profit is possible. According to Islamic rules companies has to
fulfil ethics and social responsibilities. Except national laws, regulations adapting to the
world economy and globalization they must function according and respecting to the Islamic
law.it is a request not an expectation. Islamic law is a complete and entire code that provides
rules and norms of life that are based on ethics, moral and social responsibilities (Rexhepi,
2017).

2.2.9 Payment of Zakat

Paying Zakat is one of the five fundamental pillars of Islam. Zakat is a form of worship
which involves wealth. When a Muslim person's earnings reach a prescribed amount in
excess of his needs, that person is obliged to pay a portion of his earnings to the poor and
needy (Hossain, 2012). Payment of Zakat is Obligatory Since Zakat or Islamic tax is an
important source of revenue for Islamic economies and Muslim societies. Scholars shared the
opinion that it helps the state to support the needy to fulfil their basic human needs (Jammeh,
2010). The objective of levying Zakat on individual and corporate wealth is categorized into
an economic dimension of sustainability as it boosts income. The payment of Zakat and its
transparent reporting from the perspective of Islamic banking, shareholders would increase
the goodwill of Islamic banks towards their stakeholders. As a result, the bank will obtain
more funds. (Jan, et al 2021).

2.2.10 Conformity with Sharia Law

Islamic financial system is the Shariah law which provides guidance to Muslims requiring
them to conduct their business or non-business affairs strictly in accordance with laid down
principles. For this reason, all Islamic banks are required to have a Shariah Supervisory
Board tasked with the responsibility of overseeing compliance issues on all transactions and
to offer advice on a timely manner where deviations occurred from the norm. ((Jammeh,
2010)

12
2.2.11 Sustainability on banking Industry

A firm is defined as social accountable if their management follow code of ethics, participate
in projects that provide human rights, charity and volunteering program, provide proper
conditions that protect their employee’s health etc. (Telan,2022).

The general concept of sustainability is latterly related to various segment of life such as
energy, transitional development, fiscal balances, education and banking and finance among
others (Aliyu, 2017).

Banks Provide secure bank account and loans to large amounts of capital business to fund the
growth of various industries from agriculture to housing. The concept and definition on
sustainable development are undeniable and have positive connection to Islamic teaching.
Hence, Islamic banks, should not avoid realising the objectives of sustainable development,
as the main objective of Islamic banking is to promote socioeconomic justice (Nor, 2015).

Nowadays, financial institutions have begun focusing on sustainable development strategies

as they believe that they can gain new customers in the long run as their reputation improve.
True profit is recognized when the costs of the environment and social factors are considered
when creating profit (Telan, 2022).

In current banking industry Islamic and conventional banking weighted as two rivals
alongside in many Muslim and even in non-Muslim lands. Maintaining strong sustainability
is vital to the existence profile of both parties (Jan, 2015).

(Nor, 2015) explore the social responsibility and sustainability Dimension of Islamic banking
in Malaysia. The result of the study reveals that Islamic Banks are encouraged to perform
various corporate social responsibility (CSR) activities.

There are multiple advantageous outcomes if sustainability has been incorporated within a
company. Sustainable actions can improve business performance as these actions would bring
job satisfaction, energy conservation, improve environmental innovation, better waste
management (Telan, 2022).

The need for long-term economic, social and environmental sustainability are not a
compromise issue. Therefore, Islamic banks must strike a balance between the institutional
societal and environmental sustainability in order to achieve the objective of Sharia (Aliyu, et
al. 2017)

13
Budiman et al. (2021) suggested that Islamic banks should focus on achieving environmental
and social goals and facilitating sustainable infrastructure development such as poverty
alleviation, ending hunger, promoting healthy living, equitable equity education, inclusive
and sustainable growth. They also proposed that Charity (Zakat and waqf) should be
delivered to welfare or public interest sectors that are related to sharia compliance.

Taking into account the impact of organization’s operations and their impact on the society
and environment is the most important step toward achieving sustainability (Al Meraikhi,
2021).

Different studies have looked at the topic of corporate sustainability. According to the
Nobanee study (2021), which looked at the impact of sustainability on Islamic banks social,
economic and environmental performance, the findings of the study show sustainability have
significant impact on Islamic bank’s financial performance. Banking industry holds a unique
position with regard to sustainable development because of their intermediation function
between depositors and borrowers. Islamic banking should balance economic, social and
environmental sustainability in order to achieve the objective of sharia.

2.2.11.1 Social Sustainability Dimensions

Social Dimension deals with the impact of products and services of banks on the society. In
this aspect the bank needs to develop ethical standards while granting loans to individuals,
small or large businesses, and public sector bodies. It also deals with the involvement of
bank’s staff on community’s fund raising and Philanthropic work (Marimuthu, 2015).

Social responsibility has its roots in business ethics, which places an emphasis on ethical and
legal responsibility for the company’s decisions that may have an adverse effect on various
stakeholder groups (Dec, 2021). According to (Dec, 2021) the study shows that implementing
the principle of sustainable development will offer socially responsible financial products in
financial institutions.

The intended objective of the principle of sharia are to achieve socioeconomic justice for
individual and society and to enhance welfare on society. Ignoring ethical elements in the
delivery of products and service to society may directly affect the social sustainability of
Islamic banks (Jan, et al 2021).

14
2.2.11.2 Environmental sustainability Dimensions

This dimension of sustainability also known as ecological or natural dimension. For

sustainable development, the basis of this dimension lies in its capacity to provide the natural
resource necessary for man. The environment has proven effective in the use and
redistribution of natural resource to ensure balance and life in their space
(www.lifepersona.com). Environmental Dimension is every bank’s sustainability agenda.
Banks need to minimize any negative impact of their activities which affect the environment
(Saxena, 2014).

Environmental Sustainability Dimensions for banks deals with minimizations of banks

activities which have a negative impact on the environment, at the same time it also deals
with refusing of loans to such organizations whose actions cause negative and harmful impact
on the environment. Furthermore, it also deals with granting funds to those organizations who
are engaged in renewable energy products (Marimuthu,2015).

(Marimuthu,2015) take a source from Jeucken et al. (1999) divide the accomplishment of
environmental sustainability in four steps starting from defensive banking, preventative
banking, offensive banking till achieving sustainable banking.

2.2.11.3 Economic Sustainability Dimensions

Economic sustainability of banks is a broader concept which covers the micro, macro and
structural factors. In general, economic sustainability refers to the business ability of keeping
its high earnings and maintaining business operations successfully in the long run
(Marimuthu,2015).

Economic dimension comprises the impact of products, service and customer relationship on
financial sector. The product and service of bank should be fair and transparent enough with
customers. These products encourage people to believe economic condition of the
organization as well as the country (Saxena, 2014).

According to sharia, the basic goal of Islamic banks is not to make money, but to promote
economic activities and share risks. Islamic bank engages in promoting environmental
activities of the community as per the principle of sharia (Al Meraikhi, 2021).

15
2.2.12 Practical Opportunities of Islamic Banking

2.2.12.1 The ability to grow potential market share

To Increase market share will allow Islamic banks to take cost advantage, customer base, to
boost its total sales, to be profitable, to dominance over the industry etc. The effort of
Ethiopian Muslims on the establishment of Islamic bank since 2007, the establishment
process of ZamZam Bank from 2008-2011 and other studies indicated that there is a high
demand for Islamic Finance in Ethiopia (Hailu, 2021). Take into account the availability of
huge number of Muslim populations, there is potential market share for Islamic Banks in
Ethiopia.

2.2.12.2 Availability of substantial amount of customers

Ethiopia is among the countries of the world with large Muslim populations. The current
population of Ethiopia is 121,544,964 as of Wednesday, October 26, 2022, based on
Worldometer elaboration of the latest United Nations data (worldometers.info). Half of this
population is expected to practice Islam. The availability of substantial number of Muslim
populations is an opportunity to Islamic Banks and they will not suffer with shortage of
customers.

2.2.12.3 Way of affordable access to small medium and micro enterprises

Small medium and micro enterprises are unable to provide acceptable collateral. With this
and various other reasons, they fail to meet credit criteria of conventional banks. Conversely,
Islamic finance is a way of affordable access to small medium and micro enterprises. Islamic
bank gains ownership of a portion of assets and possible higher returns as an equity partner.
Islamic bank can protect the world economy from financial crises of 2008. Kebede, (2021)
and many studies abroad reveals that Islamic banking has supreme role in stabilizing
financial and economic crises and arrests inflation. The 2008-2010 world financial crisis
shows the fruitfulness of Islamic bank in stabilizing the economy. The crises we have been
witnessing in the international financial system since 1997 have set the stage for Islamic
finance to demonstrate its viability as potentially a genuine alternative global financial system
(Iqbal, 2011).

16
2.2.13 Practical Challenges of Islamic Banking

Islamic financial institutions have performed well during the high growth period of the
industry but, with a rapidly changing global landscape, maintaining sustainable growth is just
one of many challenges (Iqbal, 2011). Even if there are encouraging practical opportunities
which have positive impact for the sustainability of Islamic banking, challenges that
influence the sustainability of Islamic banking exists as well.

2.2.13.1 Lack of Legal and regulatory frame work specific to Islamic bank

The development of financial institution requires proper regulation, supervision and

monitoring of Business activities and measurement of the impact of the institution in the
economy (Budiman, 2021). A sound legal framework is a key precondition for a safe
development of Islamic Bank. In order to provide the legal foundations for the supervision of
Islamic banks, general or specific banking laws need to define the nature of Islamic banks
and their operating relationship with the central bank and other conventional banks Mejia et
al. (2014).

The absence of Well-defined Regulatory framework is an issue for Islamic banks which lead
them not to functioning in line with sharia principles. The absence of Sharia-compliant legal
framework is major trouble which the Islamic banking system in particular and Islamic
economic system in general is facing. The present-day conventional banking laws prohibit
banks to engage directly in business activities using depositors’ funds. On the other hand, this
is the base on which Islamic banks and banking methods are built. So, new legislation
becomes inevitable. (Lone, 2015).

Hailu, (2021) emphasize that the main and significant challenges of Islamic finance is coming
from the commercial code of Ethiopia-legal framework challenges. The commercial code of
Ethiopia is an interest-based commercial code and when an interest-free financial system is
permitted the is a need for amendment for some proclamations. For instance, in the banking
business proclamation Directive No. SBB/60/2015 article 4 (4) states “A bank may hold up to
10% equity shares in a single non-banking business other than insurance business” and article
4 (6) also stated that “A bank’s aggregate equity investment in all non-bank business,
including insurance companies, shall not exceed 10% of its net worth”. Therefore, if this

17
directive applies to Islamic banking, they cannot don any Mudaraba and Musharekah
businesses.

Lone (2015) in his study suggests that the treatment of Islamic banks as traders among
Central Bank, unlike conventional banks makes legal and regulatory framework a serious
challenge. Conventional banking laws prohibit banks to engage directly in business activities
using depositors’ funds. On the other hand, this is the base on which Islamic banks and
banking methods are built. Islamic banking contracts are treated as buying and selling
properties and hence are taxed twice. This treatment implies double taxation, an issue that is
yet to be resolved by the Ministry of Finance.

An Important decision to be made by jurisdictions allowing Islamic Banks is whether to

maintain a unified core set of banking laws or regulations convenient for both Islamic banks
and conventional banks. Ensuring an adequate alignment of the regulatory framework with
the guidelines of standard setters is key to address the main risks inherent in Islamic banks
operations (Song, 2014).

Song (2014) Survey on the respondents of Palestine, Sudan, Turkey, United Arab Emirates
Afghanistan, Malaysia, Pakistan, Palestine, Sudan, and Syria noted that the legal framework
requires the setting up of national/ central Sharia board for the central Bank. In some
jurisdictions, the central bank has a sharia board (e.g., Afghanistan, Malaysia, Pakistan,
Palestine, Sudan and Syria). Despite, Sharia boards of central banks differ in their mandate,
scope, governance and accountability. The ultimate overall responsibility for a central bank’s
Sharia compliance lies mostly with its Sharia board of directors, which typically delegate the
responsibility for day-to-day sharia compliance to its senior management who is required to
ensure sharia compliance in line with the guidance of the Sariah board.

In some Countries Including Ethiopia, Islamic banks are treated with same rules to
conventional banks. National Bank of Ethiopia Should develop a comprehensive and
transparent legal framework to grow confidence in Islamic banking. Ahmed (2021) proposes
a practical dispute resolution framework for Islamic banking in Ethiopia with reference to the
experiences of three key jurisdictions in this field, namely, Malaysia, Indonesia, and the
United Kingdom. The article recommends that Ethiopia should adopt the Malaysian model,
which has established dedicated benches that apply Islamic law alongside civil law in order to
resolve Islamic banking disputes.

18
2.2.13.2 Conformity with Sharia Principles

It is observed that Islamic banks cannot perfectly comply with Islamic Shariah due to
economic system, Government rules and regulations, lack of knowledge and seriousness of
the employees and lack of research and development (Ullah, 2014).

Inadequate compliance with sharia law could weaken consumer protection as a result of
fraudulent activities and misinterpretations of the fundamental sharia rules. If depositors lose
confidence on Islamic bank’s sharia compliance, a bank could face financial Problems,
starting possibly with liquidity and developing ultimately into solvency issues (which could
become systemic if the Islamic bank id sufficiently large and connected) (Mejia, 2014).

The lack of compliance is also increasing regulatory challenges for the Islamic banking
industry in different countries. Sharia screening of investments is categorized in the economic
sustainability dimension. As it is the responsibility of the sharia committee to screen and
certify all investment of the Islamic banks in line with objectives of sharia, it attracts more
investors, and positively affects the economic sustainability of Islamic banks through the
preservation of faith (Jan, et al 2021).

Bayt al-mal (the treasury), Which used to care about the poor, the destitute, the old and the
young became the monopoly of the governors, ministers, military commanders and tax
farmers. As a result, the general public lost confidence and withdrew from urban prosperous
centres to hills and deserts in the countryside to escape oppression, injustice, execution and
confiscation. Ignorance, illiteracy, superstition, mysticism, idolatry, etc all became
widespread. The centuries-old practice of finance in Islam form was largely eclipsed under
the European influence. Most countries adopted western inspired banking systems and
business models and abandoned Islamic commercial practices. (Chachi, 2005)

As we seen the above study, the main reason for early Islamic finance to remain inoperative
and dominated with newly inspires interest-based banking system of western is not to
practice according to the sharia law. Even if there are many factors which leads to have
sustainable development and to continue with stability on Islamic finance, practice according
to sharia law is the core issue to apply as it related with divine law. When we say according
to the sharia law there must be fair and justice, need to follow rules and procedures settled by
sharia law.

19
It has been indicated that use of proper Islamic banking fiscal and monetary tools can
enhance the respective countries to recover from global economic slowdown (Global
Compose.com, 2017).

2.2.13.3 Lack of Public Awareness

As long as the Islamic Banking is concerned in the Ethiopian context, both customers and
bank employees themselves have low level of overall awareness about Islamic Banking
(Kebede, 2021). According to Ahmed 2021, opponents argued that the introduction and
concepts of Islamic banking promote religion which contravenes the constitutional principle
of separation of state and religion and state interference in religious affair based on Article 11
of the FDRE Constitution states that religion should be separated from the state. As a result,
there is the fear that establishing Islamic-based banking in a secular state such as Ethiopia
might give rise to the possibility of discrimination against non-Muslims during the provision
of Islamic banking services in the country. This critique arises from concerns about whether
Islamic institutions will extend equal rights and opportunities to non-Muslims and Muslims
during the provision of their services. In reality, this anxiety is a mere lack of understanding
with respect to the operation of Islamic laws. The main goal of Islamic banking is the proper
application of Islamic laws in the context of banking transactions without any concern of its
customers’ identity or personality.

The investors and depositors of Islamic banks would demand their banks to be prudently
involved in sustainability practices, because they will get an economic return against it.
providing scholarships to multiple stakeholders will raise the quality of education in society
and will uplift social standards (Jan, 2021).

The global propaganda on Islam also affected the expansion of Islamic finance. In Ethiopia,
some non-Muslim scholars are not supporting Islamic finance. They tried to explain the
negative perception like if Muslims are open their bank, other religious followers may ask to
establish their bank and it may result in the division of financial system (Hailu, 2021). The
perception of the public about Islamic banking before their establishment is still exist and
negatively influence Islamic banking industry market. This negative understanding among
the public can harm the industry severely as the same time it will have negative impact on the
sustainability of Islamic banking.

20
2.2.13.4 Lack of Committed Entrepreneur

It is notable that the growth of entrepreneurship volume can have a major impact on the
development of the economy as a whole through such results as reducing unemployment and
increasing levels of creativity and productivity. Islamic banks can be a source of financing for
entrepreneurship, whereby entrepreneurs can obtain their capital from Islamic banks. studies
have agreed that there is a gap in entrepreneurs' knowledge of Islamic banking products and
services in addition to complexity of policies and procedures of Islamic bank. Entrepreneurs
are ready to utilize the products of Islamic banks however, they are doubtful about Islamic
banks procedures because of a lack of information in that area (Tawfiqi, 2018).

Islamic banks participate in sale and lease-based (Ijara) contracts also involve in benevolent
finance (Qard Hasen). This mode of transaction tends to improve entrepreneurial growth
which in turn has a multiplier effect on social prosperity (Hassen, 2018).

The absence of sharia compliant legal framework limit Islamic Banks from financing
committed entrepreneur. Even if the establishment of Islamic banks in Ethiopia can have an
opportunity for small business, the legal frame work restrictions limit the entrepreneur to
involve in the business with Islamic banks. (Lone, 2015). Suggests that Islamic banks need
research and training forums in order to develop entrepreneurship skills among their clients.

2.2.13.5 Lack of Skilled Human Resource

There is a need to institute professionalism in banking practice to enhance management

capacity by competent bankers committed to their profession. This gives rise to a need for
banking professionals to be properly trained in Islamic banking and finance (Lone, 2015).

If Islamic banks operate through education or training to maintain the intelligence of their
workers, it would pave the way for them to conduct Islamic banking operations effectively.
The impact of banking staff is directly linked to the people and society. As the main aim of
the Sharia objectives is to achieve socioeconomic justice and development in line with the
Sharia principles, Islamic training and education for staff must ensure quality education
aimed at sustainable development. (Jan, 2021)

21
2.2.13.6 Lack of Risk Management Framework

The risk characteristics of Islamic banking differ from conventional baking. The risk’s sharia
attributes as financial assets, non-financial assets, real estate, commodities or work on
process inventories (Ijara, Salam or Istisna) or their result from financing made on profit
sharing bases are exposed to losses (Mudaraba and Mushareka) (Abdulkader, 2015).

The absence of a developed risk management framework in Islamic finance has a significant
impact on the current and future growth of the market because, a Sharia- compliant firm will
lose its business competitiveness because of its inability to handle variability in its costs,
revenues, and profitability through active hedging of financial risk. A firm without active risk
management will be perceived as a high - risk firm and thus will be subject to higher funding
costs and to a higher expected rate of return (Iqbal, 2011).

There is a strong relationship between the wellbeing of the banking sector and the growth of
economy. The health of the banking sector effects the health of economy at large. similarly,
the failure of banking system can disrupt economic development of the country. success of
the banking business is dependent on how efficiently an institution manages its risk. It does
not mean to eliminate or avoid risk altogether but it is proactive assessment and management
of risk for the organization’s strategic advantage. According to investment and financial
management theories, risk management is one of the most important areas in companies that
has a significant impact on the growth of a company (Ahmed et.al. 2017).

2.3 Empirical Review on Sustainability of Islamic Banking

Business firms focus upon achieving sustainable growth, as it enhances economic growth in a
competitive business environment. It also improves business firms’ social performance,
which refers to “Triple-P” (Planet, People and Profit) (Abbas et.al. 2019)

Sustainability is a major global concern. The subject has become one of the most important
ways for institutions to maintain their survival and continuance. Organizational success is
today attributed to social and environmental performance and also meeting financial goals
(Al Meraikhi, 2021).

Banks are already instructed to follow some of the policy guidelines from the central bank
and at the same time banks are also familiar with some of the sustainable products & services

22
like green banking through technological advancement in the banking operation,
environmental risk rating in the process of credit appraisal, diversified deposit & credit base
for banks through the financial inclusion etc (Parvez, 2017).

Islamic finance and sustainable development are two connected terms that one of them affect
the other (Nobanee, 2020). Most Banks have integrated sustainability within their strategic
framework by choosing to finance sustainable customers. Successful integration of
sustainability into the banking sector begins with the institution believing that sustainability
added value (Telan, 2022).

The research conducted by (Santoso, 2019) suggests that SMEs have difficulties in obtaining
financing from conventional banks due to the weak collateral they have. In addition, the
recording of financial statements that are not in accordance with the standards makes SMEs
more difficult to obtain financing from the banking sector. Therefore, it is not surprising that
the existence of Islamic banking is still very low in the SMEs environment. Islamic financial
institutions can capture the opportunities of financing capital needs of SMEs for their
sustainable growth.

Islamic finance essentially promotes financial transaction with links to the local economy and
abstains from financial activities that are detrimental to society. It supports financial inclusion
by offering instruments suited to different socioeconomic groups (Tabash, 2014).

Tabash (2014) states that, the 2008 financial crisis led to difficulties in many conventional
banks across the globe. Islamic banks in contrast were largely insulated from the crisis their
Highly regulated operational environment guided by sharia principles prohibited investment
in the type of instruments which adversely affected conventional banks and which prompted
the crisis.

Siswanti et al (2017) states that Islamic banks must maintain and enhance Islamic corporate
governance because implementation of Islamic corporate governance will have a positive
impact on improving Islamic financial performance, which will ultimately have a positive
impact on the improvement of the sustainability of Islamic banks.

Ayachi (2017) study focused on Tunisian case suggests that the Tunisian Government should
establish legislative, fiscal and accounting framework which facilitate the implementation of
all Islamic financial instruments such as Sukuk, Mudharaba, Musharaka, Murabaha, Qard

23
Hasan, Zakat, Muzaraa, Ijara, Salam, Istisnaa that contributes to the social welfare. As well as
encourage innovative investment and hence contribute to economic growth.

In order to establish a sustainable Islamic Banking system all parties (Regulators, Civil
Society, Customers, Shareholders, Employees, Managers and Shariah Advisers) should
collaborate. Choosing adequate financing strategy Should help to reach at least two
objectives of sharia namely, establishing justice and promoting welfare (Ayachi, 2017).

Hayat (2014) argues, even if the list of reasons ranges from history, law, politics regulation,
taxation, consumer behaviour and beyond, an important reason is that Islamic finance is
generally made to fit into a system designed for conventional finance and in the process of
making concessions, it seems to lose what its critics regard as its substance.

The conduct of banking supervision needs to be undertaken in a manner that addresses the
special characteristics of Islamic banks. There are two models of supervision of Islamic
Banks in jurisdictions where Islamic and conventional banks are present. In the first model,
Islamic Banks and Conventional Banks are subject to the supervision of a single supervisory
authority (e.g., Saudi Arabia, Ethiopia, Kazakhstan, Kenya, Kuwait, Qatar, Tunisia, Turkey,
the United Arab Emirates, and the United Kingdom). In the second model, supervision rests
with separate supervisory units within a single supervisory authority (e.g., Bahrain,
Indonesia, Jordan, Lebanon, Pakistan, and Syria). In practice there is typically substantial
correspondence between the different supervisory frameworks (Mejia, et al. 2014).

According to Abbas et.al (2019) most of the workforce on Islamic banks lacks an
understanding of sharia rules, and this is due to the fact that the majority of the workforce has
come from conventional banks with the knowledge of non-Islamic banking structure. They
offer the products and services of Islamic banks on the way which cause uncertainty and
dissatisfaction among customers who are seeking Islamic banking products and services.

An Empirical study of Ullah 2014 on Sharia compliance of selected Islamic banks at

Bangladesh reveals that, all the Islamic banks under study are more or less violating Islamic
Sharia and it will avoid if the higher Authority and branch management give adequate
attention and duly motivate their employee.

According to Jan et al (2018) Sharia screening during the investment falls under the category
of essential and preservation of faith. It is because Islam prohibits haram business, and the
investment in haram businesses as well. Therefore, it is necessary for the Sharia committee of

24
the Islamic banks to report about Sharia screening during the investment in their subjected
report. Performing and reporting on this item will increase the stakeholder’s confidence in the
Islamic banks. The increased stakeholder’s confidence will ultimately lead the bank towards
generating more funds. Which ultimately will increase its economic sustainability.

(Nawaz, 2016) suggests that knowledge resource (intellectual capital) helps to sustain
profitability of both conventional and Islamic financial institution. It helps maintaining
profitability at all time.

2.4 Research Gap

In financial institutions, sustainability is a business strategy that balances economic,

environmental and social concerns. It considers social and environmental factors when
making loan decisions; it ensures transparency, good governance and integrity; it upholds the
protection of the environment; it sets resource efficiency and it promotes financial help
through assisting enterprises. Sustainability is the value philosophy that states a bank’s
business activities must benefit its employees, shareholders, customers and the economy
while also conserving the natural environment. The need for sustainability is actuated by the
role of financial institutions in development (Al Meraikhi, 2021).

The role of Islamic banking and finance is to maintain social, environmental and economic
sustainability which comply with Sharia. The concept of sustainability should get attention
any business. Financial institutions or industrial firms could contribute to the human welfare,
prevent corruption and enhance social and Economic stability (Budiman et al. 2021). The
sustainability of Islamic banking is not only benefitting Muslims; its service is convenient for
all human beings without any discrimination with religion. It stands for country’s healthy
economy through alleviate poverty, promote healthy living, facilitate sustainable
infrastructure development.

Along with the establishment of Islamic banks in Ethiopia, to be sustainable on the industry is
more necessary to the development of the economy. To figure out which factors are affecting
and which have positive impact on the sustainability of Islamic banking can benefit to solve
problems early which prevent to survive on the industry. As a goal of Islamic banking is
beyond profit maximization which is to bring balance between economic, social and
environmental sustainability to meet sharia objective, it must achieve sustainable and
continual development.

25
The literatures reviewed at chapter two of this paper were conducted on the sustainability of
Islamic banking abroad the country. There are enough studies related to Islamic banking
challenges and opportunities which conducted before the formation of Islamic banking in
Ethiopia. But there are no studies conducted on the sustainability of Islamic banking due to
Islamic banking is at infant stage for Ethiopia. This research topic is unexplored area in
Ethiopia context. Even though the permission and formation of Islamic banks on our county
Ethiopia thought as success due to stringent regulation and regulatory bodies, its
sustainability is more important to meet its objectives. The researcher of this paper thought
that as legal permission of Islamic banking achieved after years of struggle, its sustainability
needs special attention. As Islamic banks are new to our country Ethiopia, there is a research
gap on the sustainability of Islamic banking in which the researcher tries to fill.

26
 Chapter Three

3 Research Methodology

3.1 Research Design

Research design is about how the research activities will be carried out. The research attempt
to assess practical challenges and opportunities impacts on the sustainability of Islamic
banking in Ethiopia, based on the practical experience of Islamic banking at Hijra Bank. To
achieve the objective of the study, the researcher would apply descriptive research design
method. Descriptive research design was used to describe the data gathered and obtain the
general overview of the subject. Descriptive survey is popular in business research and will
also enable to obtain the current information from a sizable population in a highly economical
way. The study uses Survey as an appropriate research strategy.

3.2 Research Approach

Qualitative research approach is concerned with subjective assessment of attitudes, opinions

and behaviour. Research in such a situation is a function of researcher’s insights and
impressions (Kothari, 2004). This research used qualitative research approach. The rationale
to employ qualitative research approach is to assess the practical impacts on the sustainability
of Islamic banking through the experience of Hijra Bank.

3.3 Source of Data

To achieve the objectives of the research, relevant data were collected through primary and
secondary data. Branch managers and Operational Supervisors of each branch of Hijra bank
located at Addis Ababa as well as managers at head office with different position were
participants of the study to collect primary data through Questionnaires. Furthermore, the
Director of branches Operation Mr. Husein Aman is volunteer to forward the relevant data
and professional opinion for the research through the use of semi-structured interview at the
head Quarter of his own Office locate at Bole denbel Olympya. Secondary data were
collected from related studies and dissertations, reports, Journals books and 2021-2022

27
annual report of Hijra bank. The researcher gets permission from Mr. Husein Aman to record
the interview with audio.

3.4 Data collection tools

The study will use Structured Questionnaires and semi structured Interview as Primary data
collection tools to conduct survey. The contents of questioner will be categorized into two
parts. Part one of the questionnaire will assess the attitudes of respondents about the practical
opportunities impact on the sustainability of Islamic banking and second part will figure out
the opinions of participants about practical challenges impact on the sustainability of Islamic
banking generally and Hijra bank specifically. Five Likert scale method will be uses for
measurement purpose. The interview used for this paper was semi-structured which led the
interviewee to explore his attitude, thoughts and to delve deeply into sensitive issues.
Financial Directors of Interest free banking at head office as well as Sharia supervisory board
members of both banks will have unstructured Interview to collect the relevant data.

The interview also addresses about practical challenges and opportunities impacts on the
sustainability of Islamic banking and hijra bank. Published sources which comprise related
studies, Annual reports, Journals books and online sources which include websites and online
archives will be used as secondary data collection tools.

3.5 Population

The research area of this paper is at Hijra Bank Head office and All branches located at Addis
Ababa. The researcher committed to make the study on the sustainability of Islamic banking
through an assessment on practical challenges and opportunities impact at hijra bank which
led either to liquidate or sustain the bank. The rationale behind the decision of the researcher
to select Hijra bank as the study area is, it is one of newly implemented Islamic banks which
operate according to the principles of sharia law. Which enables the researcher to study on
the topic in depth. Hijra Bank has 77 operational Branches in Ethiopia. Out of those branches
over the country, 20 branches are located at Addis Ababa. Mr. Abdu, Manager of Branch
Operation inform that there are 20 branches at Addis Ababa with 140 employees including
Branch managers and Operational Supervisors. The following table is list of Hijra bank
Branches located at Addis Ababa.

28
 Table 1: Total Number of Hijra Bank branches

No Branch Name Branches

Location
1 Medina Branch Bole
2 Ansuar Branch Betel
3 Quba’e Branch Kolfe
4 Musab masjid branch Alembank
5 Haji musa Kikiyan Branch Ehil berenda
6 Oumu Aymen Branch Dubay Ter
7 Sheik Esa Al Qatbare Branch Sumale Tera
8 Remedan Nious Berbere Tera
9 Hamza Branch Girar
10 Selam Branch Kera
11 Gofa Branch Gofa
12 Bisrate Gebriel Bisrate Gebriel
13 Kaliti Kaliti
14 Lideta Lideta
15 Haji Ture Merkato
16 Abinet Abinet
17 Gojam Berenda Gojam Berenda
18 Shegole/medhanialem Shegole
19 Hikma Branch Furi
20 Hijretein Branch Abdi nono
Branch Locator - Hijra Bank (hijra-bank.com)

To make the research bearable, this paper addressed all branches of Addis Ababa to collect
data from managers and Operation supervisors of Hijra bank. In addition, Ms. Genet,
Director of Human Resource inform that there are more than 170 Employees including 11
directors and 40 Managers at Head Quarter. Total determined population at 20 Branches and
Head Quarter to the study is below Eighty. Due to small size of population, this research will
investigate all population without select sample size.

29
3.6 Sample Size

Total population sampling is a type of purposive sampling technique that involves examining
the entire population. Most of the time, researchers consider this as their sampling method
because the entire population is so small and well-define, and a fraction of which may no
measure what is required. It can eliminate any potential bias occurring through sampling
technique (Canonizado, 2021). The researcher believes total population sampling is
appropriate for the paper because the size of population is relatively small and defined which
is below eighty.

3.7 Data Analysis

To screening validity and errors, and to analyse the data collected from source of data in
appropriate way, software package used in statistical analysis of data called statistical
package for social science (SPSS) was applied. Descriptive research approach was employed
to describe the relation between all independent variables (potential market share, availability
of customers, affordable access to small and medium enterprises, regulatory framework,
conformity with sharia, public awareness, committed entrepreneur, skilled human resource
and Risk management, and) with dependent variable (sustainability of Islamic bank). To
interpret the data, the researcher utilized qualitative analytical tools such as, identification of
commonality, categorization, and exclusion of irrelevant data, reorganization and synthesis.

30
 CHAPTER FOUR

4 DATA PRESENTATION AND DISCUSSION

4.1 Introductions

In this chapter, the findings of the study that were gathered through questionnaire and
interview will be presented and discussed. The questionnaire was composed of two sections
to make an assessment on the sustainability of Islamic banking. Part one of the questionnaire
were ask the respondents about practical opportunities and part two were about practical
challenges which have an impact on the sustainability of Islamic banking. The researcher of
this paper has not been involving questions about demographic details of respondents.
Because, demographics of participants not add value linked with the topic of the paper and is
not central to the purpose of the study. The assessment required to cover on this paper have
no relation to demographic question and is not mandatory as there is no required
measurement on the assessment. The researcher thought all that is required is just to be sure
about the respondents are on management level to get relevant, reliable and sufficient data for
the assessment of the paper. Accordingly, 80 questionnaires were distributed to the managers
and supervisors of each branch of hijra bank located at Addis Ababa and managers of
different department at head quarter of hijra bank. The response rate of the questioner
distributed was 91.25%. From the total distributed 80 questionnaires used to collect data from
participants, 73 were completely filled and returned.

4.2 Practical Opportunities impact on the sustainability of Islamic Banking

In this section, practical opportunities impact on the sustainability of Islamic banking will be
presented and discussed as follows. According to the response of questionnaire from
respondents, the data collected from interview as primary data and from annual report of last
year of hijra bank as secondary data will be compared.

31
4.2.1 The Ability to grow potential market share

Increasing market share can make any organization continual, meet its goal and to be

dominant over the industry. Participants were asked number of items to figure out practical

opportunities which can be an opportunity for the sustainability of Islamic banking. They

were asked to answer “with an Increase in market share, Islamic Banks will raise their

dominance and stay sustainable on banking industry.” The following table shows the attitude

of respondents.

Table (1) Achieving potential market share

Valid Cumulative
Frequency Percent Percent Percent

Valid Disagree 2 2.7 2.7 2.7

Neutral 1 1.4 1.4 4.1

Agree 49 67.1 67.1 71.2

Strongly
21 28.8 28.8 100.0
Agree

Total 73 100.0 100.0

Source፡ Survey result 2023

According to table (1) 2.7% participants disagree, 1.4% neutral to forward their responses,
while 67% of respondents agree and 28.8% Strongly agree with raising potential market share
can make Islamic banks sustainable and continual.

Majority of participants’ response exhibits that utilization of potential market share is

potential opportunity for Islamic banking industry to stay sustainable. There is a wide market
for Islamic banking in Ethiopia as it is unique by its nature from conventional banks and it is
new for banking industry of Ethiopia. Therefore, Islamic banks can take this opportunity to
be sustainable on the banking industry by utilize available market share for Islamic banking.
(Hailu, 2021) also mention that there is high demand for Islamic banking in Ethiopia which is

32
potential opportunity for Islamic banks. Similarly, the finding from interview reveals, the
market share achieved currently is appreciable and promises bright future. He also mentions
that current market share achieved by Islamic banks is the result of efficient work for the last
operation months.
Based on the findings on this part, there is solid and untapped market share for Islamic banks
which can able them to compete with rivals through special service which comply with
sharia. We can say this available market share is an opportunity which have positive impact
on the sustainability of Islamic banking. The reader of this paper can also understand the
findings from respondents’ reveal that potential market share can be potential opportunity for
Islamic banks to be sustainable on the industry.
4.2.2 Availability of substantial amount of customers

The researcher tries to conduct an assessment whether the availability of customers can be an
opportunity for Islamic banking to become sustainable on banking industry. The respondents
were asked that “widening the customer base will contribute positive impact on the
sustainability Islamic Banking.”

Table (2) Availability of substantial customers

Valid Cumulative
Frequency Percent Percent Percent

Valid Strongly
1 1.4 1.4 1.4
Disagree

Disagree 1 1.4 1.4 2.7

Agree 26 35.6 35.6 38.4

Strongly Agree 45 61.6 61.6 100.0

Total 73 100.0 100.0

Source፡ Survey result 2023

The percent of respondents about the impact of availability of substantial customers on the
sustainability of Islamic banking shown on table (2) is 1.4% strongly disagree, 1.4 %
Disagree, 35.6% Agree and 61.6% Strongly agree. Majority of participants agree with
availability of customer can be opportunity for the sustainability of Islamic banking.

33
According to Hailu (2021) Ethiopia is among the countries with large number of Muslim
populations who strongly need Islamic banking service. it is also expected that non-Muslim
communities who are interested in ethical finance may also access Islamic finance products
and services. The findings of this paper also similar with (Hailu, 2021) which is, availability
of substantial customer is the first potential opportunity for Islamic finance industry. In
addition to the result acquired from questionnaire, the following opinion is collected from the
interview. The interviewee forwards his opinion about availability of customers all over the
world who satisfied with Islamic banking service. Additionally, mention that to utilize those
available customers according to the sharia principle can able Islamic banks to be sustainable.

According to the findings of this paper on this portion we can say that the availability of
substantial customers can be potential opportunity for the future sustainability of Islamic
banking. Because, availability of substantial customer can help to widen customer base which
in turn increase the market share of an organization.

4.2.3 Way of affordable access to small medium and micro enterprises

As Our country Ethiopia are among developing countries of the world, there are huge number
of populations with low economic scale who need to be financed as small medium and micro
enterprisers. Islamic banks offer affordable access for small medium and micro enterprises
which able to alleviate poverty. Another important question asked to assess practical
opportunities which have an impact on the sustainability of Islamic banking were about
affordable access to small medium and micro enterprises. The question was asked “the
encouragement of Islamic banking on small medium and micro enterprise will help to fight
poverty and contribute positive impact on the sustainability of Islamic Banking.”

34
Table (3) Affordable access to small medium and micro enterprise

Valid Cumulative
Frequency Percent Percent Percent

Valid Strongly
1 1.4 1.4 1.4
Disagree

Disagree 2 2.7 2.7 4.1

Agree 20 27.4 27.4 31.5

Strongly Agree 50 68.5 68.5 100.0

Total 73 100.0 100.0

Source፡ Survey result 2023

Table (3) reveals that 1.4% respondents were strongly disagree, 2.7 disagree, 27% agree with
Islamic banks accessibility to small medium and micro enterprises can have positive impact
on the sustainability of Islamic banks and 68.5% strongly agree with the statement that the
nature of Islamic banking is an opportunity for the sustainability of Islamic banks.
The testimony of respondents indicates that financing SMEs is among practical opportunity
which able Islamic banks sustainable. Similarly, the opinion collected from interview
mention that Islamic banks stand or focus more for those whose economic scale is low and
medium. It offers affordable products for small medium and micro enterprises which have
vital role for economy growth.
Hassen, (2018) emphasize that in order to achieve Islamic banking objective, the spirit of
inclusiveness should be a priority. With this in mind, one of the social objectives expected
from Islamic bank is to focus on financing SMEs to drive those with an entrepreneurial mind
out of abject poverty.
Bases on the findings we can conclude that promote and financing SMEs is an opportunity
for Islamic banks to have sustainable growth on the future.

The respondents were asked for further information about whether Hijra Bank Promote
financial inclusion through the provision of affordable financial access to micro small and
medium enterprises or not.

35
Table (4) financial inclusion of SME enterprises at Hijra Bank

Valid Cumulative
Frequency Percent Percent Percent

Valid Strongly
3 4.1 4.1 4.1
Disagree

Disagree 13 17.8 17.8 21.9

Agree 38 52.1 52.1 74.0

Strongly Agree 19 26.0 26.0 100.0

Total 73 100.0 100.0

Source፡ Survey result 2023

According to table (4) 4.1% respondents strongly disagree, 17.8% disagree, 52.1% agree and
26% strongly agree with Hijra bank promote financial inclusion through financing small
medium and micro enterprises. High number of participants ensure that hijra bank promote
financial inclusion through financing SMEs. This can contribute for Hijra bank as well for
Islamic banks positive impact on their sustainability.
In a like manner, the data collected through interview mention that there are enterprises
which has been financed at Hijra bank with in its last operation year. It finances up to
100,000 capitals for single SMEs to start a business. He also suggests that Hijra bank mainly
works with low and medium economic scale population to grow together. The interviewee
said that, Hijra bank have currently 11,000 shareholders within the range of 30,000-
10,000,000. This figure shows Hijra Bank is not a capitalists’ bank rather it includes
communities from poor to rich. This can keep hijra bank sustainable on Islamic banking
industry and contribute prosperity for countries economy.

The information collected from secondary data on 20212-2022 Annual report of hijra bank
also notify that Hijra bank offer Murabaha financing to customers with different business
who found at different regions of the country. Both findings which collected from primary
and secondary data reveals that financing SMEs can be potential opportunity for the
sustainable growth of Islamic banking.

36
4.3 Practical challenges impact on the sustainability of Islamic Banking

The study also investigates practical challenges which have an impact on the sustainability of
Islamic banking. In the succeeding portion the results and findings will be presented.

4.3.1 Lack of Legal and regulatory frame work specific to Islamic bank

One of the research questions which tries to investigate practical challenge is whether or not
the current rule and regulation available for Islamic banking is the challenges for the
sustainability of Islamic banking. The respondents asked that “does the treatment of Islamic
Bank and Conventional Bank under similar rules and regulations will drive Islamic Bank to
lose its concept and negatively affect the sustainability of Islamic bank?”

Table (5) Lack of Islamic rules and regulation framework

Valid Cumulative
Frequency Percent Percent Percent

Valid Disagree 4 5.5 5.5 5.5

Agree 27 37.0 37.0 42.5

Strongly
42 57.5 57.5 100.0
Agree

Total 73 100.0 100.0

Source፡ Survey result 2023

As presented in table (5) 5.5% participants disagree, 37% Agree and 57.5% strongly agree
with the treatment of Islamic Bank and Conventional Bank under similar rules and
regulations will drive Islamic Bank to lose its concept and negatively affect the sustainability
of Islamic banks.

High number of respondents’ attitude indicates, the current interest-based banking rules and
regulations which serve Islamic banking are not convenient to implement and practice
fundamental products of Islamic banking which are Mudarabah (passive partnership in which
earned profit will be allocated between investor and entrepreneur, but the bank will bear all
loss except the negligence of the entrepreneur) and Mushareka (is joint partnership in which

37
both partners will share profit and loss as pro-rata amount). This can make limit Islamic
banks not to deliver their special service to the customers as well as not to compete with
rivals through utilization of all Islamic banking products.

The above finding shows similar result with (Hassen, 2018) he suggests that the regulations
which govern Islamic banking transaction are entirely different from those covering
conventional counterparts in principle. Islamic banks should comply with international
regulation that is compatible with Islamic jurisprudence so they can compete globally.

The findings of this paper also share the suggestion forwarded by (Hailu, 2021) that the main
and significant challenges for Islamic banking is current interest-based commercial code. the
commercial code of Ethiopia is an interest-based commercial code and there is a need for
amendment for some proclamation to able Islamic banking implement fundamental financial
products of Islamic banking which are Mushareka and mudarabah.

The researcher tries to ask further question on lack of rules and regulation impact on the
sustainability of Islamic banking to find out the participant’s opinion regarding Islamic
growth.

Table (6) Applying particular rules for Islamic bank

Valid Cumulative
Frequency Percent Percent Percent

Valid Disagree 1 1.4 1.4 1.4

Agree 23 31.5 31.5 32.9

Strongly
49 67.1 67.1 100.0
Agree

Total 73 100.0 100.0

Source፡ Survey result 2023

In table (6) the percentage figures are based on the numbers of participants. 1.4% of
participants disagree, with the statement. While the majority number of respondents which is
31.5% Agree and 67% strongly agree with the statement which Islamic banks can achieve
should future sustainable growth if rules and regulations convenient for Islamic banks
formulated.

38
The respondents’ opinion ensures that Islamic bank and finance is completely differing with
conventional banks. Setting particular rules to treat Islamic banks can make Islamic banking
industry sustainable and help to meet its goal effectively.

The interviewee of this paper also suggests, the current rules of banking industry are not
convenient to apply all Islamic banking instruments. Governor of national bank of Ethiopia
does not grant permission to apply Musharaka as any bank can’t involve in the business
which need more than 10% of its equity. Additionally, the absence of sharia advisory board
who advice at National Bank of Ethiopia makes the rules not to consider the principle of
sharia for Islamic banking. The interviewee finally forwards that the lack of rules and
regulatory framework specific to Islamic banks have negative impact on the sustainability of
Islamic banking.

According to the above findings, rules and principle specific for Islamic banks are used for
the execution of commercial and financial contracts and transaction. In contrary, the
treatment of similar rules for those different systems can harm the industry and as the same
time it affects the sustainable growth of Islamic

4.3.2 Lack of Public Awareness

The following question which askes the participants of this paper is about the challenge of
lack of public awareness on the sustainability of Islamic banking. Which asks Lack of public
awareness about Islamic banking will negatively influence the sustainability of Islamic
banking.

Table (7) Lack of public awareness about Islamic banking

Valid Cumulative
Frequency Percent Percent Percent

Valid Disagree 1 1.4 1.4 1.4

Agree 20 27.4 27.4 28.8

Strongly
52 71.2 71.2 100.0
Agree

Total 73 100.0 100.0

Source፡ Survey result 2023

39
The output shown on table (7) reveals that 1.4% disagree, 27.4% Agree and 71.2% strongly
agree with lack of public awareness about Islamic banking will negatively influence the
sustainability of Islamic banking.

The respondents with high percent indicate that lack of public awareness have negative
impact on the sustainable growth of Islamic banks. The interviewee of this paper similarly
suggests that there are many findings which assure Islamic banking was a cure for the great
financial crises of 2008. It stables the world economy. But majority of population especially
in Ethiopia the perception about Islamic banking is entirely wrong. This can be challenge for
Islamic banks to compete with conventional banks and become sustainable. The interviewee
raises David Cameron’s speech on 2014 about Islamic banking service that “I want to make
Great Britain the centre of Islamic banking”. The interviewee explains David Cameron’s
speech as he doesn’t mean he want to make Great Britain Muslim through the application of
Islamic banking but, Islamic banking can stable country’ economy. Those who have
appropriate awareness about Islamic banking understand that sustainability of Islamic
banking can have vital role for healthy development of country’s economy.

From the response of the participants the reader of this paper can clearly understand, there is
still awareness gap among the public about the concept of Islamic banking. This perception
can harm its future sustainability. Many non-Muslim populations thought Islamic banking is
all about religion, it establishes to promote Islam, it serves only Muslims. But the reality is on
contrary. Islamic bank is for all without discriminating with religion or other criteria. Islam
strictly forbids paying or receiving interest, to involve on harmful business. This principle is
not only use for Muslim it also necessary for all human beings, the social and environment
too. To overcome this challenge which can affect the sustainability of Islamic banking,
Islamic banks which already on market should focus on educating the public.

The respondents were asked further question to determine whether or not the public have
clear and adequate awareness about financial products of Hijra Bank as well as the concept of
Islamic banking is not to promote religion.

40
Table (8) Awareness about Hijra bank products

Valid Cumulative
Frequency Percent Percent Percent

Valid Strongly
21 28.8 28.8 28.8
Disagree

Disagree 34 46.6 46.6 75.3

Agree 12 16.4 16.4 91.8

Strongly Agree 6 8.2 8.2 100.0

Total 73 100.0 100.0

Source፡ Survey result 2023

According to table (8) 28.8% respondents strongly disagree with the public have clear and
adequate awareness about financial products of Hijra Bank as well as the concept of Islamic
banking is not to promote religion, 46.6% disagree, 16.4% Agree and 8.2% strongly agree
with the statement.
The outcome of the above data shows the respondents’ opinion. It ensures the public doesn’t
have clear and adequate awareness about Islamic banking. This in turn affects its
sustainability of Islamic banks.

One of the respondents from Branch managers of Hijra bank additionally mention that lack of
public awareness is practical challenge for Islamic banks. The respondent recommended
public awareness gap is among main setbacks which need to be solved to the continuity and
sustainability of Islamic banking.

The finding from interview also suggests that the public have negative understanding and
wrong information about Islamic banking as well as hijra bank which affect the sustainability
of Islamic banking. Rather than to compete with special products and service to satisfy
customer, there is spreading wrong information and unethical competition with rivals too.
The interviewee additionally mentions that unethical competition like segmentation with
religion and racism will harm not only Islamic banks it also harms banking industry through
time. Lack of public awareness is a challenge which practically influences the sustainability
of Islamic banking. Finally, he recommended that Hijra and other Islamic banks must solve
this challenge.

41
The finding about public awareness gap collected from secondary data 2021-2022 Annual
report of hijra bank similarly notify that advertisement and promotion about hijra bank and its
service must widely operate to overcome the current negative understanding of the public.

According to the findings collected from both primary and secondary data, we can conclude
public awareness gap about Islamic banking service and its objectives has negative impact on
the sustainability of Islamic banking.

4.3.3 Lack of Committed Entrepreneur

Entrepreneurship gives large scale employment. It is the way to generate income and create
wealth. Another critical item assessed with this paper is whether lack of committed
entrepreneur have negative impact on the sustainability of Islamic banking or not. The
respondents asked “Lack of committed entrepreneur who utilizing the product and financial
contracts (i.e Musharaka and Mudarabah) of Islamic banking will have negative impact on
the sustainability of Islamic banking.”

Table (9) lack of committed entrepreneur

Valid Cumulative
Frequency Percent Percent Percent

Valid Strongly
1 1.4 1.4 1.4
Disagree

Disagree 6 8.2 8.2 9.6

Agree 47 64.4 64.4 74.0

Strongly Agree 19 26.0 26.0 100.0

Total 73 100.0 100.0

Source፡ Survey result 2023

Table (9) shows that 1.4% respondents strongly disagree, 8.2% disagree 64.4% agree and
26% strongly agree with lack of committed entrepreneur as Islamic bank will have negative
impact on the sustainability of Islamic banking. As shown in the table the respondents
opinion indicates that entrepreneurs are the one who utilize fundamental Islamic banking

42
products those are Mushareka and Mudarabah. Complexity of current regulation restrain
entrepreneurs from utilizing those business contracts. This can affect the growth of Islamic
banks. It has negative impact for the sustainability of Islamic banking.

4.3.4 Lack of Skilled Human Resource

Intellectuality and skill are fundamental issue to comply Islamic banking operation with
sharia principle. To treat customers and investors according to the sharia principle, skilled
and intellectual manpower must be available. Which have positive impact on the
sustainability of Islamic banking. In order to assess this item, the respondents were asked
whether lack of skilled human resource have an impact on the sustainability of Islamic
banking or not. They asked “Lack of higher level of intellectuality and skill among sharia
supervisory board and employees about the sharia principle of Islamic banking will affect the
sustainability of Islamic bank.”

Table (10) lack of skilled human resource about Islamic banking

principles

Valid Cumulative
Frequency Percent Percent Percent

Valid Agree 38 52.1 52.1 52.1

Strongly
35 47.9 47.9 100.0
Agree

Total 73 100.0 100.0

Source፡ Survey result 2023

The table above with the percentage of participants along with their opinion reflects 52.1%
respondents agree with lack of higher level of intellectuality among sharia supervisory board
and employees will affect the sustainability of Islamic bank. where, 47.9% respondents
strongly agree with the statement.

The opinion of participants reveals similar result to Nawaz (2016), which is Intellectual
capital (higher education and skill) is a resource which helps to sustain profitability also it is
necessary for banks being conventional or Islamic to create value.

43
2021-2022 Annual report of hijra bank also notify that there is lack of human resource on the
market which is a challenge faced by Islamic banks. To overcome this challenge hijra bank
give training about customer service, Islamic banking and other trainings related to banking
operation to more than half of the staff and management training for managers.
The data gathered from the interview express that Personnel at any organization should know
and understand about the firm’s goal. If it goes to the contrary, it will harm the sustainability
of that organization. having experienced and skilled human resource have vital role on the
sustainability of Islamic banking.
All the above findings reveal to the reader of this paper, intellectual and skilled human
resource about sharia principle of Islamic banking and finance is critical for Islamic banks to
protect Islamic banking and financing concept from misleading in wrong way and it helps to
achieve their business objectives.

4.3.5 Lack of Risk Management Framework

Finally, this study tries to assess lack of risk management impact on the sustainability of
Islamic banking. Business risk cannot be completely eliminated, but it can be alleviated
through risk management strategies.

Respondents were required to forward their opinion on the question, “The absence of
developed risk management frame work in Islamic bank negatively affect the growth and
sustainability of Islamic bank.”

Table (11) lack of risk management framework

Valid Cumulative
Frequency Percent Percent Percent

Valid Strongly
2 2.7 2.7 2.7
Disagree

Disagree 4 5.5 5.5 8.2

Agree 42 57.5 57.5 65.8

Strongly Agree 25 34.2 34.2 100.0

Total 73 100.0 100.0

44
Source፡ Survey result 2023
An output result of participants on table (11) shows 2.7% strongly disagree, and 5.5%
disagree, with the question asked. While 57.5% agree and 34.2% strongly agree with the
absence of developed risk management frame work in Islamic bank negatively affect the
growth and sustainability of Islamic bank.

The question tries to asses whether lack of risk management have an impact on the
sustainability of Islamic banking. It is inevitable that any business exposes for variety of risk.
Lack of risk management frame work cause firms not to be able to achieve future goal, it can
also result in business failure. On the contrary, any organization should undertake good risk
management to reduce default risks and operational loses. The result shows that, lack of risk
management frame work have negative impact on the sustainability of Islamic banking. As
Islamic banking operation is equity-based, it needs to adopt good risk management to be
sustainable on the business invested.

The study conducted by Iqbal et.al. 2018 on the role of risk management on the sustainable
growth of Islamic banking also reveals similar result with the above findings. which is credit
risk having significant impact on sustainable growth of the Islamic banks and credit risk
management is an important predictor of sustainable growth rate of Islamic banks. The study
conclude with the sustainable growth rate of Islamic banks is affected by the bank’s risk
management capabilities.

The respondents were asked Additional question for further data about lack of risk
management impact. They required to forward their opinion whether or not Hijra Bank apply
risk management framework to keep its loyalty to the investors and to make its business
sustainable.

45
Table (12) Application of risk management frame work at Hijra
bank

Valid Cumulative
Frequency Percent Percent Percent

Valid Disagree 4 5.5 5.5 5.5

Neutral 2 2.7 2.7 8.2

Agree 43 58.9 58.9 67.1

Strongly
24 32.9 32.9 100.0
Agree

Total 73 100.0 100.0

Source፡ Survey result 2023

Table (12) shows 5.5% of respondents Disagree, 2.7% neutral, 58.9% Agree and 32.9%
strongly agree with Hijra Bank apply risk management framework to keep its loyalty to the
investors and to make its business sustainable.
Majority of the respondents’ opinion indicates Hijra bank adopt risk management framework
to achieve sustainable growth. The findings gathered from interview also mention that there
are variety of risk like sharia compliant risk and investment risk which need good risk
management. The interviewee suggests Hijra bank have risk management frame work to
make ongoing investments and business operation manageable. It also has a department
which implement for the purpose of risk management.
Based on the findings we have got we can conclude, lack of risk management frame work
affects the sustainability of Islamic banking.

The researcher of this paper would like to include additional suggestion forwarded by the
interviewee as well as put on annual report of Hijra Bank 2021-2022. This was, competition
with conventional banks with current banking policy is the main challenge for Islamic banks
because the current rule does not allow competing effectively. Among the challenges put on
the annual report, competition and political issue are another setback for the sustainability of
Islamic banking.

46
 CHAPTER FIVE

5 SUMMERY, CONCLUSION AND RECOMMENDATION

In this section summery of the findings about practical opportunities and challenges impact
on the sustainability of Islamic banking will be summarized, the findings of the study get into
conclusion, finally some typical recommendation will be forwarded.

5.1 Summery

Sustainable growth is a key for an organization to achieve the objective of the firm. The
aspiration of this paper is to recognize those determinants which have an impact on the
sustainability of Islamic banking. As the same time this study aims those challenges and
opportunities tried to be assessed should get solution for long term survival of Islamic
banking. This study selected independent variables to make an assessment on their impact on
the sustainability of Islamic banks in Ethiopia. The response gathered with questionnaire and
the data collected from the interview for the purpose of this study was assist to meet the
objective of the study.

The respondents were asked about practical opportunities impact on the sustainability of
Islamic banking. The first practical opportunity for the sustainability of Islamic banking is
Potential market share. There are few Islamic banks now established in Ethiopia. This bank
can capture potential market share for the products and services they offer.

The next opportunity which assessed in this study is availability of customers who strongly
need the service and products of Ethical banking. As our country Ethiopia is among those
countries which have huge number of Muslim communities. These substantial numbers of
Muslim communities were excluded from banking sectors because of the services offer in
conventional banks are entirely on the contrary of sharia. Therefore, Islamic banks can be
sustainable by serving those Muslim even non-Muslim communities. They can build strong
customer base which have significant impact for their continuity and sustainability.

The last opportunity selected for this paper is small and medium enterprises can be way for
the sustainability of Islamic banking. It is not easy for SMEs to be financed by conventional
banks due to the criteria they asked and the collateral they pledge. There for SMEs need to be
financed with Islamic banking and finance institutions. This is an opportunity for Islamic

47
banks to make a business with those SMEs and prosper together. This prosperity lightens
future sustainability of Islamic banking.

This paper also tries to make assessment on the challenges which influence the sustainability
of Islamic banking. Current rules and regulations applied for Islamic banks are not
convenient to make all financial contracts of Islamic banking.

Another challenge is public awareness about Islamic banking. The perception of the public
about the sector is still negative. There is an attitude among the public that Islamic bank is
formulated to serve only Muslim communities and it is about promoting religion. This
perception can severely harm the Islamic banking sector from moving forward with expected
speed. It affects sustainability of Islamic banking.

The respondents were also asked their opinion about lack of skilled human resource, lack
committed entrepreneur and lack of risk management impact on the sustainability of Islamic
banking. The responses of the participants were all the challenges mention above affect the
sustainability of Islamic banking.

5.2 Conclusion

The key findings of this paper are summarized as follows

There is wide market share for Islamic banking which can be used as an opportunity for
the sustainability of Islamic Banking Industry. To achieve available market share can help
Islamic banks to have sustainable growth.

Utilizing the available amount of customer is practical opportunity for the sustainability
of Islamic banking. Customers who need to use sharia compliant banking are substantial.
If existing Islamic banks conform to sharia rules, they can achieve more than expected
number of customers to be served under their operation.

In developing countries including Ethiopia majority of the population needs to be

financed with small micro and medium enterprise. Islamic banking can keep its
sustainability through financing small medium and micro enterprises as SMEs have vital
role for the economy of a country. Islamic banking is a way of affordable access for
SMEs. The nature of Islamic banking itself is an opportunity for its sustainability.

48
The commercial and banking laws appropriate for implementation of Islamic banking and
financial contracts do not exist. On the contrary the existing banking laws contain
provision which is narrowly defines and prohibits the scope of Islamic banking activities
with in conventional limits. They are not convenient to Islamic banks to apply all their
products and limit Islamic banks not to get into the intended goal. The current rule
applied for Islamic banks directly or indirectly prohibits banks to engage directly in
business activities. On the other hand, this is the base on which Islamic banks and
banking methods are built. This is critical challenge which harms the sustainability of
Islamic banking industry.

There is a gap in public awareness; the public have wrong understanding about Islamic
banking.

The fundamental contracts of Islamic banking (Musharala and Mudaraba) are business
which Islamic banks as an investor engage to do with entrepreneurs. But the rules settled
by national bank of Ethiopia don’t allow those financial instruments of Islamic Banking.
This causes lack of entrepreneur who will join Islamic banks. The findings of this study
indicates that Lack of committed entrepreneurs whom utilize the products of Islamic
banking have negative impact on the sustainability of Islamic banking.

Performing the operation of an organization without the appropriate knowledge and skill
can harm the customers of the firm. This study assessed and come up with the conclusion
that lacks of skilled and intellectual human resource about Islamic banking principles
have negative impact on the sustainable growth of Islamic banking.

Any business organization faces business risk. But the risk of Islamic banking sector is
special as it is asset-based operation. It needs more attention and must be manageable. On
the contrary the lack of risk management for Islamic banking can cause failure and have
negative impact for its sustainability.

Which we come to finalize the conclusion of this paper, sustainability can be achieved if
Islamic banks utilize available opportunities and overcome current practical challenges as
well as if the industry performing well with steady growth in the market.

49
5.3 Recommendations

Islamic banks should promote about Islamic banking and its products to completely avoid
the wrong understanding of the public. As well as they should create proper awareness
about the objective of Islamic banking is not about promoting religion.

The treatment of different system under similar rules can hurt the sustainability of Islamic
banking. There must be suitable and specific banking policy for Islamic asking. because
Islamic banking system is completely different with conventional banks. Standard setters
at National bank of Ethiopia should adopt its own Sharia advisory board as experienced in
other countries and collaborate to set specific rules and regulations in line with sharia
principle and to motivate Islamic banks.

As Islamic banking industry is young, the concept of sustainable growth of Islamic

banking in Ethiopia requires further empirical research and investigation.

50
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56
 APPENDIX

Questionnaire for Data Collection

St. Mary’s University

School of Graduate Studies

Department of Accounting and finance

Dear Participants:

This survey is aimed at the Assessment of Practical Challenges and opportunities Impact
on the sustainability of Islamic Banking at Hijra Bank. It is conducted by Graduate
Student of MBA in Accounting and Finance. It will require approximately 5-10 minutes to
fill in this questionnaire. Thank you for taking your precious time in assisting me with this
research. Your participation is entirely volunteer. However, in doing so will greatly enhance
the understanding of this research focus. It is insured that all the information will be kept
confidential and anonymous. It is also ensuring that this information will be used solely for
academic purpose.

Thank You for Your Cooperation!

Please use SD for (Strongly Disagree), D (Disagree), N (Neutral), A (Agree), and SA (Strongly
Agree) to respond the questions below.

Part One: Assessment on Practical Opportunities for the sustainability of Islamic banking

S. SD D N A SA
N
1 With an Increase in market share, Islamic Banks will raise
their dominance and stay sustainable on banking industry.

57
 2 Availability of substantial customers can build customer base
and it will contribute positive impact on the sustainability
Islamic Banking.

3 The encouragement of Islamic banking on small medium and

micro enterprise will help to fight poverty and contribute
positive impact on the sustainability of Islamic Banking.

4 Hijra Bank Promote financial inclusion through the provision

of affordable financial access to micro small and medium
enterprises.

Part Two: Assessment on Practical Challenges for the sustainability of Islamic banking

S.N SD D N A SA

1 The treatment of Islamic Bank and Conventional Bank under

similar rules and regulations will drive Islamic Bank to lose
its concept and negatively affect the sustainability of Islamic
bank.

2 Islamic banking will grow faster and meet its goal if it will
be treated with particular rules and regulations which
compliant with the sharia principles.

3 Lack of public awareness about Islamic banking will

negatively influence the sustainability of Islamic banking.

4 The public have clear and adequate awareness about

financial products of Hijra Bank as well as the concept of
Islamic banking is not to promote religion.

5 Lack of committed entrepreneur who utilizing the product

58
 and financial contracts (i.e Musharaka and Mudarabah) of
Islamic banking will have negative impact on the
sustainability of Islamic banking.

6 Lack of higher level of intellectuality and skill among sharia

supervisory board and employees about the sharia principle
of Islamic banking will affect the sustainability of Islamic
bank.

7 The absence of developed risk management frame work in

Islamic bank negatively affect the growth and sustainability
of Islamic bank.

8 Hijra Bank apply risk management framework to keep its

loyalty to the investors and to make its business sustainable.

Additional Comments

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
____________________________________________________________________

59
Interview for Director of Brance Operation at Hijra bank S.C

1. What is the impact on the sustainability of Islamic banking to increase market share?

2. What is the impact on the sustainability of Islamic banking to have substantial

customers who need sharia compliance Islamic banking service?
3. What is the contribution for the sustainability of Islamic banking to finance small
medium and micro enterprise?
4. Does hijra bank start financing small medium and micro enterprises?

Interview about practical Islamic challenges

1. What is the impact of the lack of legal and regulatory framework on the sustainability
of Hijra bank specifically and Islamic banks generally?
2. Is current rules and regulation of Ethiopian banking industry challenge for hijra bank
to operate in line with sharia principles?
3. As it is the fundamental issue to comply with sharia principle, does Hijra bank follow
all the procedures of the sharia without the interfere of regulatory bodies?
4. Lack of compliance with the sharia rule can be reason to lose customers and investors
which occur the bank financial problem and affects economic sustainability?
5. Does the public have clear and adequate awareness about Islamic banking and its
concept is not to promote religion?
6. What impact the absence of committed entrepreneur can have on the sustainability of
Islamic?
7. Does Hijra bank set up risk management platform to make the business with the
entrepreneurs and investors manageable?
8. As sharia screening of investment is categorized in economic sustainability
dimension, Does Hijra bank’s sharia committee responsible to screen and certify
investment?
9. If You have additional opinion or suggestion from your experience and your
profession on the topic, please?

60
በኢስላሚክ ባንኪንግ ዘላቂነት ላይ ተጽዕኖ ያላቸው እድሎች

1. የገበያ ድርሻን ማሳደግ ለኢስላሚክ ባንኪንግ ዘለቄታዊነት ያለው አዎንታዊ ተፅዕኖ ምንድን ነው?
2. ከፍተኛ የሙስሊሙ ህብረተሰብ ቁጥር መኖር እንዲሁም የደንበኞችን ፍላጎት የሽሪዐ ህጉን በመከተል ውስጥ
ማሟላት ለኢስላሚክ ባንኪንግ ዘለቄታዊነት ያለው አዎንታዊ ተፅዕኖ ምንድን ነው?
3. የሀገሪቱን ድህነት ለማቅለል ጥቃቅንና አነስተኛ ተቋማትን ፋይናንስ ማድረግ ዘርፉ ዘላቂነት እንዲኖረው
አዎንታዊ ተፅዕኖ ይፈጥራልን?
4. ሂጅራ ባንክ ጥቃቅንና አነስተኛ ተቋማትን ፋይናንስ በማድረግ ኢስላሚክ ባንኪንግ ዘላቂነት እንዲኖረው
ድርሻውን እየተወጣ ነውን?

በኢስላሚክ ባንኪንግ ዘላቂነት ላይ ተጽዕኖ ያላቸው ተግዳሮቶች

1. ዘላቂነት ላለው የኢስላሚክ ባንኪንግ ቢዝነስ ከመደበኛው የባንክ መተዳደሪያ ህግ የተለየ ህግና ደንብ አስፈላጊ
ነውን?
2. ለኢስላሚክ ባንኪንግ የተለየ ህግና ደንብ አለመኖሩ ለሂጅራ ባንክ እንደ አጠቃላይ ደግሞ ለኢስላሚክ ባንኪንግ
ዘላቂነት ያለው አሉታዊ ተጽእኖ ምንድን ነው?
3. አሁን ኢትዮጵያ ላይ ያለው የባንኮች ህግና ደንብ ሂጅራ ባንክ ከሸሪዐ ህግ ጋር እንዲጣረስ አሉታዊ ተፅዕኖ
የሚፈጥር ነውን?
4. ለኢስላሚክ ባንኪንግ ሸሪዐን ተከትሎ መስራት መሰረታዊ ጉዳይ እንደመሆኑ ሂጅራ ባንክ ያለ ሶስተኛ ወገን
ጣልቃ ገብነት ሁሉንም የሸሪዐ ህግ ተከትሎ እየሰራ ነውን?
5. በሂጅራ ባንክ ሸሪዐ ኮሚቴ የሚደረግ ኢንቨስትመንትን መከታተልና ከሸሪዐ ህጉ ጋር መዛመዱን መመርመር
ኢስላሚክ ባንኪንግ ኢኮኖሚያዊ ዘለቄታ እንዲኖረው አዎንታዊ ተፅዕኖ ይፈጥራልን?
6. ማህበረሰቡ ስለ ሂጅራ ባንክ፣ ስለ ኢስላሚክ ባንኪንግ አግልግሎት እንዲሁም የኢስላሚክ ባንኪንግ አላማ
ሀይማኖትን ማስተዋወቅ እንዳልሆነ ግልፅና በቂ ግንዛቤ አለውን?
7. በዕውቀት የዳበረና በልምድ የታገዘ ሰራተኛ እንደልብ አለመገኘት ለኢስላሚክ ባንኪንግ ዘላቂነት ያለው አሉታዊ
ተፅዕኖ ምንድን ነው?
8. የሪስክ ማኔጅመንት አለመኖር የኢስላሚክ ባንኪንግ ዘለቄታዊነት ላይ የሚፈጥረው አሉታዊ ተፅዕኖ ምንድን
ነው?
9. ሂጅራ ባንክ ለሚስጣቸው አገልግሎቶች እንዲሁም ከባለሀብቶች ጋር በጋራ ለተሰማራባቸው ንግዶች
ያስቀመጠው ሪስክ ማኔጅመንት መዋቅር አለን?
10. ለኢስላሚክ ባንኪንግ ዘለቄታዊነት ቢስተካከሉ ወይም ቢቀጥሉ የሚሏቸውን ተጨማሪ አሉታዊና አዎንታዊ
ተፅዕኖዎች ካሉ;

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