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Licensing and Authorization of Interest Free Micro-financing Business (Directive No. 824/2021)

National Bank Of Ethiopia824/2021

Summary

This directive establishes the framework for licensing and authorizing interest-free microfinancing businesses in Ethiopia, ensuring they operate safely and soundly according to Islamic law principles.

Who's affected

Microfinance institutions in Ethiopia that are engaged in or intend to engage in interest-free microfinancing business.

Action required

Microfinance institutions must submit a duly completed application with specified documents to the National Bank of Ethiopia to obtain a license or authorization for interest-free microfinancing activities.

Key points

6
  • Directive No. 824/2021 governs the licensing and authorization of interest-free microfinancing business.
  • The directive aims to promote financial inclusion and ensure safe and sound operations.
  • Specific requirements are detailed for licensing and authorization applications.
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    • Interest-free operations must adhere to Sharia principles.
    • Separate accounts and reporting are mandatory for interest-free windows.
    • Non-compliance with balance sheet share restrictions can lead to window closure.

Requirements

8
  • Persons intending to establish an interest-free microfinance institution must apply to the National Bank for a license.
  • Microfinance institutions need written authorization from the National Bank to operate an interest-free microfinancing window.
  • Applications for authorization must include reports on resource mobilization and use, planned balance sheets, risk management programs, financial strength evidence, and adherence to regulations.
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    • Microfinance institutions must maintain separate books of accounts for interest-free microfinancing windows.
    • Quarterly reports on interest-free microfinancing window activities must be submitted to the National Bank.
    • Microfinance institutions must comply with all regulatory and supervisory requirements except those on interest rates.
    • Boards of directors must develop detailed policies and procedures on Shariah oversight.
    • Existing businesses must comply with the directive within six months of its effective date.

Rights and permissions

3
  • The right to apply for a license to establish an interest-free microfinance institution.
  • The right to apply for authorization to operate an interest-free microfinancing window.
  • The right to conduct interest-free microfinancing business in a manner consistent with Islamic law or Sharia principles.

Restrictions

3
  • Microfinance institutions cannot alter the maximum share of their interest-free microfinance window in their consolidated balance sheet without prior National Bank approval.
  • Interest-free microfinancing business must be conducted in a manner consistent with Islamic law or Sharia principles.
  • Microfinance institutions must comply with all regulatory and supervisory requirements except those related to interest rates.

Penalties

1
  • Failure to comply with the prohibition on altering the balance sheet share may result in the closure of the interest-free microfinancing window.

Objectives

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  • To promote interest-free microfinancing business for greater financial inclusion.
  • To ensure interest-free microfinancing business is carried out in a safe and sound manner.
  • To establish clear, objective, and transparent requirements for licensing and authorization.

Organizations

2
  • National Bank of Ethiopia
  • Microfinance Institutions

Legal references

3
  • Microfinancing Business Proclamation No. 626/2009
  • Microfinancing Business (Amendment) Proclamation No. 1164/2019
  • Directive No. MFI/23/2013
Original sourcehttps://justice.gov.et/en/directives/licensing-and-authorization-of-interest-free-micro-financing-business-directive-no-824-2021/
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