The term “Interest Free banking” refers to a system of banking that is consistent with Islamic law (Shariah) principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values).
Financial system based in Islamic tenets are dedicated to the elimination of the payment and receipt of such interest in all forms. It is this taboo that makes Interest Free Banking (IFB) and other financial institutions differ in principle.
In the 20th century, scholars, Naeem Siddiqi, Maulana Maududi, Muhammad Hamidullah, all recognized the need for commercial banks and their perceived "necessary evil," and proposed a banking system based on the concept of Mudarabha – Means a relationship in which one contributes capital and other contribute expertise to earn profit and sharing the profit at 50:50 ratio. The Investor is called Rab ul Maal and the other party is termed as Mudarib. Further works specifically devoted to the subject of interest-free banking were authored by Muhammad Uzair (1955), Abdullah al-Araby (1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974).
According to some study, it is belived that interest free banking was began in the mid of 1960s in Egypt Mit-Gamer bank. Nawadays this banking practies has expanded to become a distinictive and fast growing segment of the international banking and capital markets. There are well over 200 Islamic banks operating in over 80 countries comprising most of the Muslim world.
IFB also engaged in Islamic Insurance (takafu), Islamic Investment house, Mutual funds, Leasing companies, and commodity trading companies at multilateral level.
As the Commercial Bank of Ethiopia (CBE) is licensed by the National Bank of Ethiopia to give these services, it would provide the services at specified windows of selected branches of the bank. Interest free banking is available to all customers who want to make use of the alternative banking service. CBE has a separate and dedicated system that does not mix the movement of accounts in those windows with the regular ones.
o General Permissibility: - everything is allowed unless specifically prohibited by the Sheria Law. Consistent with sharia, the following undertakings are not allowed to utilize interest free banking services:
§ Running pig farm and pork trading;
§ Alcoholic beverages production and alcohol trading;
§ Gambling and related activities such as running casinos as well as other activities classified as harmful to the society in general.
Activities categorized under the above are barred from accessing interest free banking services.
o Profit and Loss Sharing Principle: - the one who takes the risk has the right to share in profit.
o Asset Backed Financing: - is an asset-backed security that can be used to finance on investments since the underlying assets generate the return that is not directly linked to a predetermined interest rate.