The National Bank of Ethiopia has introduced a framework enabling interest-free banks and conventional banks with approved interest-free windows to exchange short-term liquidity through Sharia-compliant investment arrangements. Directive No. EPD/02/2026, signed by NBE Governor Eyob Tekalign and effective November 12, 2026, sets a minimum transaction size of 25 million birr, with amounts above this threshold increasing in increments of one million birr. All transactions must be denominated in Ethiopian birr.
The framework addresses a longstanding operational challenge for interest-free banking institutions: the shortage of suitable instruments for placing surplus funds and obtaining short-term financing without using interest-based lending. The directive complements Directive No. EPD/01/2026, which establishes interest-free open market operations and standing facilities, expanding the liquidity-management tools available to the sector. Eligible participants include NBE-licensed interest-free banks and conventional banks operating approved interest-free banking windows. Institutions must apply in writing for membership, with the central bank required to respond within five working days.
The market operates through an investment agency arrangement known as Wakalah, rather than conventional interbank lending. A bank providing surplus funds acts as the principal, while the receiving institution acts as the agent, investing the funds in Sharia-compliant commercial activities for the agreed period. The directive initially permits overnight and seven-day placements, with overnight transactions settled by 10 a.m. on the following business day. Participants quote an expected profit rate on an annualised basis, which serves as an indicative benchmark for comparing transactions rather than a guaranteed return.
The framework distinguishes between lower-than-expected profits and investment losses. If actual profits meet or exceed the expected rate, the principal receives its investment and the expected profit, while the agent may retain earnings above that amount as an incentive fee. Where profits fall below expectations, the principal receives its capital and the profit actually earned. Losses arising without negligence, misconduct or contractual breaches by the agent are borne by the principal, while the agent is liable where losses result from its negligence, misconduct or failure to meet contractual obligations.
Transactions may be conducted on secured or unsecured terms, with banks making unsecured placements notifying the central bank in advance. For secured transactions, eligible collateral includes interest-free government securities and instruments issued by the NBE, provided they offer sufficient coverage after risk-related valuation adjustments. The framework places responsibility on participating institutions to maintain internal risk-management systems, monitor investments daily and comply with market conduct rules. Late settlement of matured transactions may attract penalties calculated using the expected profit rate plus five percentage points, with the central bank also able to impose administrative fines, revoke market membership or pursue legal action under Proclamation No. 1359/2025.
For savers, borrowers and businesses, this framework creates dedicated mechanisms for managing short-term liquidity within Ethiopia's interest-free banking sector while maintaining Sharia compliance. The system relies on participating institutions to assess investment risks and meet settlement obligations, with the central bank enforcing market conduct rules and preventing manipulation.