Banking Without Interest?

Welcome to this week’s edition of ፍራንክ Digest!

Your weekly brief on all things Finance and Investing. Quick, enjoyable reads for busy professionals in 5 minutes or less.

Topics this week:

•  🔬 ZERO Percent: The rise of interest-free banking solutions

• ☔ Mastering Personal Finance: How to keep expenses in check in an inflationary environment

Thanks for reading!

Interest Free Banking…Solution On The Horizon?

Banking

Interest-free banking is an alternative banking experience focusing on fees rather than interest. 

The concept was first developed in Pakistan and then more widely in Egypt in the 1960s to attract faith related aversions to አራጣ (undue levels of interest rate and the negative social impacts arising from it). This explains the current use of ‘sharia’ (Islamic law) as its ethical underpinning.  

The concept all boils down to the bank acting as an equity investor rather than a lender.

Examples of interest-free products offered by local banks in Ethiopia are:

• Savings- time deposit account with minimum deposit of 100k for ¼, ½, 1 or 2 years which pays a profit earned from the bank’s financing activities. The profit sharing ratio is 30% bank and 70% depositor. Depositor bears the loss in case of negative return.

• Trade finance- cost plus margin financing to acquire goods such as equipment, raw material, inventory or working capital needs.

• Export finance- pre shipment funding up to 80% of the export sales contract for the purchase of raw materials, warehousing costs, processing up to shipping of the finished goods. The maximum duration of the fund for a single contract is 4 months.

 Is it a good fit for the Ethiopian economy?

• Financial inclusion- provides access to banking services for the underserved population, including small businesses that are generally not able to access conventional banking services due to collateral requirements.

• Economic stability- promotes risk sharing and discourages speculative practices. Sustainable growth can mitigate the impact of financial crises and promote long-term economic development.

• Agriculture- originally designed in Pakistan for rural communities. The time gap between land tillage and harvesting can extend for months. The right funding products could offer benefits for farmers by accessing advance finance for quality inputs (seeds, fertilizer, irrigation and mechanical farm tools) and reduce food wastage (proper storage, transport and selling point investments).

Despite these advantages, the penetration of interest-free banking in Ethiopia is still relatively low. Challenges observed by our team include:

• Shortage of experienced professionals in interest-free banking. This is expected due to the recent introduction of the sector but can be remedied by engaging expats and diasporas

• Limited product awareness by potential customers

• Lack of supportive infrastructure. New-entrant local banks are finding it difficult to partner with foreign first-rate correspondent banks to facilitate international trade

• Limiting legal frameworks and the credit cap introduced by the National Bank of Ethiopia

On a positive note, a closer look at the first fully-fledged interest-free bank, Zamzam Bank, has turned a profit in 2022/23 financial year for the first time in its 3rd year since establishment where:

• Deposits in savings account reached ETB 4.98 bln a 46.9% ↑ from the previous financial year

• Loan disbursement reached ETB 3.585 bln, 5 times greater than the previous financial year, but still below private banks front runner Awash Bank’s interest-free window disbursing 6.947 bln

• Innovative customer engagement programs have been launched by leveraging Artificial Intelligence (AI) for customer credit scoring in partnership with Qena (by Kifiya Technologies) and integrating payment platform by Kacha.

As interest-free banking continues to grow, it has the potential to play a pivotal role in Ethiopia’s financial landscape. With increased awareness and the right support, institutions and individuals alike are poised to profit from the value of this ethical banking alternative.

The Under-Appreciated Art Of Controlling Expenses

Personal Finance

Expenses! Boy oh boy do we hate them.

Rent, groceries, gas, insurance, phone bills and the list goes on….

Expenses are ways to keep up with the constant demand of life, however small or big. They are essential and yet they could drain the life out of you if you’re not on top of them. That’s why personal finance is so important, especially when your hard earned money starts to lose value as soon as it’s deposited in your account.

This couldn’t be more true today with the Ethiopian economy facing high rates of inflation contributing to የኑሮ ውድነት

Let's face it, money doesn't grow on trees (unless you're a magician, in which case, can you teach us your ways?). By keeping your expenses in check, you can:

• Build up your savings for emergencies or future investments

• Reduce financial stress and improve your overall well-being

• Have more freedom to spend on things that truly matter to you

Controlling your expenses doesn't have to be as daunting as climbing Ras Dashen mountain. Here are three simple steps you can take to get started:

• Track your spending: Keep a record of where your money is going each month. You might be surprised by how much you're spending on things you don't really need (Using an expense tracker can be a life saver here).

• Create a budget: Set limits on how much you can spend in different categories, like groceries, entertainment, and dining out. Stick to your budget like an Amir glue!

• Cut back on unnecessary expenses: Do you really need to indulge in the dessert menu at your local pastry shop or need the latest iPhone? Think twice before making impulse purchases and consider if they align with your financial goals.

Moral of the story: watch those expenses cause they are certainly watching you!

Side note: My last expense at the time of writing is the 190 Birr I spent on a hot chocolate while waiting for a friend that never showed up.  

Look into your finances and see what you last spent money on, was it worth it?

Tune in next week as we look at what impact the diaspora has on remittance and investments for እምዬ እትዮጵያ.