NBE presentation about defending an IFB .pptx

business plan

1. IFB FEASIBILITY STUDY

2. Table of Contents 01 Lion Bank Profile 02 Our Vision for Interest-Free Banking 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

3. 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.

4. 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 experienced in the recent past years.

5. 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”. Photo by Pexels

6. 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

7. 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

8. 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 Preparation

9. Human Resource Board of Directors *Sharia Advisory Board President *Director - IFB Department Manager - IFB Financing *Manager - IFB Branch operation and Accounts

10. Specialized Training on IFB Staff Training Initiated: We have begun providing specialized training for all concerned staff in Sharia-compliant financial services practices. 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. Ongoing Training: Continuous training programs will be conducted to keep our team updated on the latest developments in Islamic banking and ensure full compliance.

11. 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.

12. Profitability of Interest-Free Banking (IFB)

13. Table of Contents Asset Growth Income Growth Cash Flow Growth CAMEL

14. 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 the long term.

15. 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-compliant financing, and diverse revenue streams

16. 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.

17. 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 faced by banks such as credit, market, and operational risks

18. 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, reflecting strong asset quality.

19. 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 rate of 68.4% in key financial metrics, demonstrating strong managerial quality..

20. 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 to alternative investments and conventional bank deposit rates.

21. 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.

22. 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.

23. 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

24. IFB Deposit Target Deposit (In millions) Year 1 Year 2 Year 3 Year 4 Year 5 Wadi’a saving account (70%) 331.8 980 1,449.7 2,235.1 3,285.80 Wadi’a current account (20%) p 142.2 280 414.2 638.6 938.8 Mudarabah saving (unrestricted) (5%) 70 103.55 159.65 234.7 Mudarabah term deposit (unrestricted) (5%) 70 103.55 159.65 234.7 Total deposit 474 1,400 2,071 3,193 4,694

25. IFB Financing Products Murabaha Qard Salam Istisna Amount of fund allocated for each IFB financing products (Birr in million) Financing Products Year 1 Year 2 Year 3 Year 4 Year 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 Total investment pool 270 854 1,263 1,948 2,863

26. Other IFB SERVICE Kafalah ( Guarantee) Foreign Exchange (Sarf) Hawala

27. Table of Contents 01 Introduction 02 Key Risks in Islamic Banking 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

28. 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 practice. Photo by Pexels IFB encounters various risks during its operations, typically categorized into three: operational risk, financial risk, and management risk. Operational risk

29. 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 sharing the business risks. Effective risk management involves regular and rigorous monitoring and evaluation of these investments. . Photo by Pexels Operational risk cont.….

30. Liquidity risk: To mitigate this risk, Diversifying funding sources and avoiding over-reliance on current accounts. Photo by Pexels 2. Financial risk

31. 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 credible parties. Photo by Pexels 3. Management Risk

32. 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 Shari'a board, and employing continuous improvement practices. Photo by Pexels 3. Management Risk cont.

33. Murabahah Contracts: Risks and Mitigations Photo by Pexels 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 should pay the amount directly to the supplier, having invoice of the asset purchased and physical inspection of goods.

34. Murabahah Contracts: Risks and Mitigations Photo by Pexels 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 basis. - Takaful cover for destruction of the asset in transportation.

35. SWOT Analysis Photo by Pexels

36. 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. Photo by Pexels

37. Weaknesses Photo by Pexels 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.

38. 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 environment for the Bank. Photo by Pexels

39. 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. Photo by Pexels

40. 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. Photo by Pexels