IFB FEASIBILITY

STUDY
 01 Lion Bank Profile
Table of 02 Our Vision for Interest-Free Banking

Contents 03 Laying the Foundation for Interest-Free Banking

04 Sharia-Compliant Policies and Procedures

05 Adapting Technology for Islamic Banking

06 Building a Skilled Workforce

07 A Commitment to Ethical Finance

Lion Bank Profile
• Established on October 2, 2006
in accordance with proclamation
no: 84/94 and the commercial
code of Ethiopia; officially
commenced operation on
January 6, 2007.

• The Bank’s Senior Management

is composed of 27 members who
have a combined banking service
experience of well over 566
years, averaging each member’s
banking experience to 21 years.
Lion Bank Profile
• Despite the challenges arising from
the war in the Northern Regions as
well as the preceded economic
slowdowns as a result of the COVID-
19, the bank has maintained its
profitability supported by the long-
sustained saving deposit resource
bases which in turn have relied on
vast customer bases - making the
bank resilient to any shocks occurring
in its line of business.

• the bank was efficient and resilient

enough in earning returns from its
total asset and the total
shareholders’ equity even under dire
business environment which the bank
 Our Vision and
Mission
LIB envisions to be “the best
banking service provider in
Ethiopia” and embarks on the
mission:
“We are committed to providing
diversified banking products and
services which maximize
shareholders’ value and customer
loyalty through service excellence,
innovation, and professionalism,
while remaining conscious of our
social responsibilities”.

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Rationale To Start IFB
Service
 Growing demand for Sharia-compliant
financial services

 Inclusivity: Serving an underserved

segment of the population

 Aligning with Ethiopia’s diverse

economic and cultural values

 Supporting financial inclusion and

ethical investment

 Customers Request
 Preparation
1. Policies And
Procedures
 Policies
 Interest Free Banking Policy ( Operation,
Financing & Accounting)
 IFB KYC Policy
 IFB Risk Management Policy
 Procedures
 IFB Branch Banking Procedure
 IFB Financing Procedure
 IFB KYC Procedure
 IFB Accounting Procedure
 Others
 Business Plan
 Sharia Advisory Charter
 Preparation
2. System Adaptation
Customized the existing software for
Interest-Free banking operations
Integration with core banking systems
for smooth, compliant transactions

 Compliance checks and automated

workflows

 Separate Reporting System

 Human Resource

Board of Directors

*Sharia Advisory
Board

President

*Director - IFB
Department

Manager - IFB Financing *Manager - IFB Branch

operation and Accounts
 Specialized Training
on IFB
1.Staff Training Initiated:
 We have begun providing
specialized training for all
concerned staff in Sharia-
compliant financial services
practices.
2.International Exposure:
 Arrangements are in progress to
offer international exposure and
learning opportunities for the
board and top management,
ensuring global best practices are
implemented.
3.Ongoing Training:
 Continuous training programs will
be conducted to keep our team
 Branding Name
 The proposed brand name for its IFB service, "Lion
Tayib", reflects the bank’s commitment to providing
success and prosperity through Sharia-compliant
financial services.

 The term "Tayib," derived from Arabic, signifies

purity, wholesomeness, and goodness, which aligns
with the bank's commitment to delivering financial
solutions that are both ethical and in full compliance
with Sharia principles.

 By choosing this name, We are sending a clear

message to its customers that it is a trustworthy and
sharia-compliant banking service.
Profitabilit
y of
Interest-
Free
Banking
(IFB)
Table of
1. Asset Growth
Contents
2. Income Growth

3. Cash Flow

Growth

4. CAMEL
 Asset Growth
 The total assets are projected to rise
significantly throughout the projection
period.

 IFB assets are projected to grow from

535.38 million birr in Year 1 to 5.2 billion
by Year 5.

 This asset growth ensures that the bank

remains competitive and sustainable in
 Income Growth
 The bank projects steady growth in
revenue mainly from profit from
financing and other income streams
such as, service fees, commission from
Kafalah, and other income sources,

 Total profit before tax in Year 1 is

projected at 16.25 million birr.

 By Year 5, this figure is expected to rise

to 649.37 million birr, driven by
expanding customer base, Sharia-
 Cash flow Growth
Cash flow will start at 273.4 million birr in
Year 1 and grow to 2.4 billion birr by Year 5.
 This is driven by rising customer
deposits and operational efficiency.
 Capital Adequacy
 Adherence to the statutory minimum
capital requirements is essential in
determining capital adequacy, with the
bank consistently maintaining levels
above the NBE's 8% minimum, as
recommended by Basel II

 The Financial projection shows that the

bank will maintain more than 8% capital
adequacy throughout the projection
period to balance the potential risks
 Asset Quality
 Asset quality is critical in IFB, where loan
losses from delinquent loans or
unidentifiable risks in receivables pose
significant challenges

 To mitigate these risks, the IFB business

will implement thorough Know Your
Customer (KYC) processes, proper loan
appraisals, and continuous monitoring

 The projected yearly provision for bad

debts is capped at 3% of total financing,
 Management Quality
 Management quality assesses the
effectiveness of the board, top
management, and Sharia Board in
identifying, measuring, and controlling
IFB business risks while ensuring
compliance with laws and regulations
 The bank's experienced management,
known for its success in conventional
banking, is expected to replicate this
success in IFB. Additionally, the bank will
provide training to employees to bridge
any gaps in IFB service knowledge.
 Financial projections indicate that the
bank's management is capable of
maintaining an average annual growth
 Earning Capability
 The bank's return on assets (ROA) will

reach to 10.4% will reach at the end the

projection period

 The return on investment (ROI) for

Investment account holders 12.7% at

the end of the projection years.

 These returns are competitive compared

 Liquidity
 A robust financial institution ensures
sufficient liquidity to meet its obligations
promptly and can convert assets to cash
with minimal loss.

 Throughout the projected years, the

bank's liquidity ratio remains above
49%, indicating its capacity to meet
short-term obligations efficiently.
 NPV
Particulars Cash Inflow DF (10%) Present Value (PV)
Year 1 1,171.04 0.9091 1,064.59
Year 2 3,691.55 0.8264 3,054.72
Year 3 5,750.25 0.7513 4,320.16
Year 4 8,911.60 0.683 6,086.62
Year 5 13,202.55 0.6209 8,197.46
Total Cash Inflow PV 22,719.53
Total Investment 535.38
NPV 22,184.15

During the projection period, the

bank's NPV remains positive,
confirming that the IFB business
under a window-based operation is
feasible.
IFB Saving Products
• 1. Wadia Saving Account
• 2. Wadia Current Account
• 3. Mudarabah Investment Accounts

 Mudarabah Children’s Saving Account

 Mudarabah Youth Saving Account

 Mudarabah Women’s Saving Account

 Mudarabah Education Saving Account

 Mudarabah Entrepreneur Saving Account

 Mudarabah Retirement Saving Account

 Normal Mudarabah Saving Accounts

 Fixed Time Mudarabah Saving Accounts

 IFB Deposit Target
Deposit (In millions) Year Year Year 3 Year 4 Year 5
1 2
Wadi’a saving 331. 980 1,449.7 2,235.1 3,285.80
account (70%) 8

Wadi’a current 142. 280 414.2 638.6 938.8

account (20%)p 2

Mudarabah saving 0 70 103.55 159.65 234.7

(unrestricted) (5%)
Mudarabah term 0 70 103.55 159.65 234.7
deposit
(unrestricted) (5%)
474 1,40 2,071 3,193 4,694
Total deposit
0
 IFB Financing
Products
1.Murabaha
2.Qard
3.Salam
4.Istisna
Amount of fund allocated for each IFB financing products (Birr
in million) Products
Financing Year Year Year Year Year
1 2 3 4 5

Murabaha (70%)
189 598 884 1364 2004
Istisna (12%) 32 102 152 234 344
Selam (8%) 22 68 101 155 229
Qard (10%) 27 86 126 195 286
270 854 1,26 1,94 2,86
Total investment pool 3 8 3
 Other IFB SERVICE

1.Kafalah ( Guarantee)

2.Foreign Exchange (Sarf)

3.Hawala
 01 Introduction
Table of 02 Key Risks in Islamic Banking

Contents 03 Credit Risk

04 Market Risk

05 Liquidity Risk

06 Shari’a Compliance Risk

07 Mudarabah Contracts: Risks and Mitigations

08 Murabahah Contracts: Risks and Mitigations

09 Salam Contracts: Risks and Mitigations

10 Istisna Contracts: Risks and Mitigations

 IFB encounters various risks during its operations,
typically categorized into three: operational risk,
financial risk, and management risk.

1.Operational risk

Credit Risk: can be managed through

collateral requirements or by including
penalty clauses for late payments, with
penalties going towards charitable
causes.
Displaced Commercial Risk: Measures
like maintaining a Profit Equalization
Reserve (PER) or Investment Risk
Reserve (IRR) help mitigate this risk in
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 1.Operational risk cont.….

Withdrawal Risk: If an interest-free

bank offers lower returns compared to
competitors, depositors may withdraw
their funds. It can be mitigated by
offering competitive rates of return and
by maintaining PER or IRR.
Equity Investment Risk: This risk
occurs when an interest-free bank
enters into partnerships (Mudarabah
and Musharakah contracts) to finance
specific business activities, thereby

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sharing the business risks. Effective risk
 2. Financial risk

Liquidity risk: To mitigate this risk,

Diversifying funding sources and
avoiding over-reliance on current
accounts.

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 3. Management Risk

Reputation Risk:- To mitigate this risk,

fostering close collaboration among
financial institutions, standardizing
contracts and practices, conducting
rigorous self-assessment, and
establishing industry associations.

Sharia compliance Risk: - To mitigate

this risk, banks should implement
controls, including a Shari'a board,
Regular reviews of Shari'a compliance by
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 3. Management Risk cont.

Fiduciary risk: is inherent in profit and

loss sharing within Interest-Free finance,
often due to Shari'a non-compliance or
mismanagement of investors’ funds.
Mitigation strategies include
implementing a strong management
system with well-trained professionals.
Operational risk: Mitigation tools this
risk include training programs for staff
prior to commencing operations,
establishing a qualified and reputable
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 Murabahah
Contracts: Risks and
 Mitigations
Agency risk: A client refuses to
purchase goods after taking
possession as agent.
 Mitigation tools: Promise to
purchase the ordered goods is
obtained from customers.
 Buy-back risk: A client may not
purchase fresh asset as he/she has
already purchased an asset and wants
funds for payment to the supplier. This
action involves buy-back which is non-
Shari' compliant.
 Mitigation tools: The bank
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should pay the amount directly to
 Murabahah Contracts:
Risks and Mitigations
Asset risk: An asset has been used by
customer before offer and acceptance or an
asset may not exist when Murabahah is
executed due various reasons. This makes
MPO non-Shariah compliant.
Mitigation tools:
- Reducing the time interval when offer is
to be accepted.
- Physical inspection of goods on a random
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 SWOT
Analysis

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 Strengths

 Experienced Management: The Bank's

management is well-versed in both conventional
and Islamic banking, ensuring a smooth and
effective operation of IFB services.

 Strong Customer Base: The Bank has a strong

customer base and wide acceptance of its
products, providing a solid foundation for the new
IFB services.

 Extensive Branch Network: The Bank has a

wide network of branch outlets, providing easy
access to banking services across various regions,
which will facilitate the roll-out and adoption of
IFB services.

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 Weaknesses

 Limited Borrower Pool: The strict adherence to Sharia principles

may limit the number of eligible borrowers.

 Variability in Sharia Interpretation: Differences in Sharia

interpretation among scholars can lead to inconsistencies in
product offerings and compliance.

 Public Hesitance: Some segments of society, particularly within

the Muslim community, may be hesitant to adopt new banking
methods.

 Limited Experience: The Bank has limited experience in Islamic

banking, which could be a drawback in the initial stages.

 Awareness Gaps: There is a lack of awareness among customers

about IFB services.

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 Opportunities

 Untapped Markets: There is a significant unbanked

Muslim population in Ethiopia, along with non-
Muslim segments open to ethical banking options.

 Economic Growth: Ethiopia’s rapid economic

development presents opportunities for expanding
IFB services.

 Technological Advancements: The availability of

modern banking technology facilitates the efficient
delivery of IFB services.

 Legal Framework: The existence of legal permission

from NBE to operate IFB creates a favorable
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 Threats

 Religious Misconceptions: The perception that IFB is

exclusively for Muslims may limit its appeal to non-
Muslims.
 Regulatory Risks: Ongoing regulatory constraints
could hinder the growth and diversification of IFB
products.
 Competition: The market is becoming increasingly
competitive with the entry of new IFB-focused banks.
 Security Concerns: Security and instability in some
parts of the country could pose risks to IFB
operations.
 Consumer Behavior: Consumers are becoming more
price-sensitive, which could impact the adoption of
IFB services.
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 1

IFB Service Delivery

Plan
Window-Based and Dedicated
Branch Approach
1. **Window-Based Service Modality**: We will
continue offering Islamic banking services through
designated windows within conventional branches.
This model ensures that customers can access both
conventional and Islamic banking at the same
location, providing flexibility without additional
infrastructure costs.
2. **Dedicated Branches**: In regions with high
demand, we will establish fully dedicated branches
focused solely on Islamic banking.
•

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