FACTORS AFFECTING INTEREST FREE BANKING IN ETHIOPIA: A CASE STUDY OF COMMERCIAL BANKS LOCATED SOUTH-WEST ADDIS ABABA

Abstract

Banking industry fosters economic growth through financial intermediation. Which helps in meeting a debtor with a creditor and perform host of other financial services. Ethiopia adopted Interest Free Banking window scheme in 2011 and Full-fledged interest-free banking by June, 2021 as alternative banking system in addition to conventional by considering substantial number of unbanked Muslims communities, which estimated more than 38 million or 33.8% of total population. The emergence of Interest free financial system has created a new dimension to the current economic models and financial developments. Hence, use of such innovations is highly appreciated even if its successes depend on the various internal and external factors. Therefore, this study aims to investigate the main factors affecting interest-free banking system. For these purposes, primary and secondary data were collected and analyzed by using descriptively and inferential statistics. Finally, the model suggests that Interest free banking has positive and strong relationships with internal and external factors of qualified and skilled human resource, creation of awareness to community, ,suitable and effective banking policy and procedure, effectiveness of existing banks, overall managerial efficiency, working with Sherian Verdict and Principle, Research and development(RD) while contradict with Treasury risk of liquidity and solvency. Finally, enhancing and enforcing standards of regulatory law, policy and procedure is advisable for all commercial banks to sustain all its strength, and to improve their limitation.