Building an Islamic Finance and Capital-Market Ecosystem in Ethiopia

Policy Architecture, Market Instruments and Investment Roadmap for the Ethiopian Securities Exchange

Research article —By Samson Tsedeke Download the book

Abstract

Ethiopia has established the principal institutional foundations for interest-free banking and capital-market development. Full-fledged interest-free banks and Islamic banking windows operate under National Bank of Ethiopia regulation; the Capital Market Proclamation created the Ethiopian Capital Market Authority; and the Ethiopian Securities Exchange began regulated trading in July 2025. Yet these components do not currently constitute a complete Islamic financial ecosystem. In particular, Ethiopia lacks an integrated framework connecting interest-free banking, Sharia-compliant securities, government debt management, monetary-policy operations, taxation, institutional investment and secondary-market liquidity.

The market opportunity is material. National Bank of Ethiopia data indicate that interest-free banking deposits reached ETB 379.11 billion, while the global Islamic financial-services industry held assets of approximately USD 3.88 trillion in 2024. Sukuk, Islamic investment funds, Sharia-screened equities, Islamic real-estate investment vehicles and sustainability-linked products could therefore mobilise domestic savings, broaden Ethiopia’s investor base and finance public infrastructure and private enterprise.

This article argues that Ethiopia should adopt a sequenced model. The first stage should establish legal and tax neutrality, national Sharia governance and short-term sovereign Islamic securities. The second should introduce a benchmark sovereign sukuk and Sharia-compliant monetary-policy facilities. The third should develop corporate, municipal, green, retail, diaspora and social sukuk, supported by Islamic funds, takaful and institutional investors. International experience suggests that successful markets are built not merely by authorising sukuk, but through predictable issuance, reliable asset-transfer rules, transparent Sharia governance, tax neutrality, central-bank liquidity facilities and enforceable investor rights.

Keywords: Ethiopia, Islamic finance, sukuk, Islamic capital market, Ethiopian Securities Exchange, interest-free banking, monetary policy, green sukuk, financial inclusion.

1. Introduction

Islamic finance is no longer a specialised financial segment confined to Muslim-majority economies. It is a global industry covering banking, capital markets, investment funds, insurance and social-finance instruments. The Islamic Financial Services Board estimated total global Islamic financial-services assets at USD 3.88 trillion in 2024, an increase of 14.9% from 2023. Islamic banking represented approximately 71.6% of industry assets, while outstanding sukuk represented about 23.3%. Sukuk and takaful recorded annual growth of 25.6% and 16.9%, respectively.

Ethiopia is entering this market from a distinctive position. It already has:

regulated interest-free banking;
full-fledged interest-free banks and conventional-bank windows;
provisions for interest-free microfinance;
a new capital-market regulator;
an operational securities exchange;
a growing government-securities market; and
a National Interest-Free Finance Strategy under development.

The National Bank of Ethiopia held a validation workshop for the National Interest-Free Finance Strategy in May 2026. The Bank characterised the strategy as an instrument for strengthening financial inclusion, savings mobilisation, private-sector growth and economic modernisation. (National Bank of Ethiopia)

The central question is therefore no longer whether Ethiopia should recognise Islamic finance. It already does. The relevant question is whether Ethiopia can transform separate banking, securities and public-finance reforms into a coherent financial ecosystem.

That transformation matters for three reasons.

First, it is a financial-inclusion issue. Ethiopia’s National Financial Inclusion Strategy recognised that Sharia-compliant services could reach people excluded from conventional finance for religious reasons. It identified mudarabah, musharakah, murabahah, ijara, takaful and sukuk among the relevant product categories.

Second, it is a capital-mobilisation issue. Ethiopia requires long-term financing for energy, transport, housing, irrigation, logistics, manufacturing, digital infrastructure and municipal development. Bank balance sheets alone cannot provide the volume and maturity of financing required.

Third, it is a monetary-policy and financial-stability issue. Interest-free banks require liquid, tradable and high-quality Sharia-compliant assets. Without such assets, they may hold excessive cash, face constrained liquidity management and participate imperfectly in central-bank monetary operations. A functioning sukuk market is therefore not simply an alternative government borrowing channel. It is part of the operating infrastructure of a dual financial system.

2. Research approach

This article is based on a desk review of:

Ethiopian proclamations, directives and official regulatory publications;
National Bank of Ethiopia reports and strategies;
Ethiopian Capital Market Authority publications;
publications of international Islamic financial standard setters;
sovereign debt-management and central-bank experience from selected jurisdictions; and
official market statistics from established Islamic capital markets.

The analysis distinguishes between three related but separate policy domains:

Islamic finance, covering banking, takaful, microfinance, leasing and social finance;
Islamic capital markets, covering sukuk, Sharia-compliant shares, funds, collective investment schemes and real-estate instruments; and
interest-free monetary operations, covering central-bank liquidity absorption, liquidity injection, standing facilities and eligible collateral.

No primary interviews were conducted. Recommendations should therefore be subjected to formal legal, tax, fiscal, market-demand and Sharia reviews before implementation.

3. The nature of Islamic capital-market instruments

Islamic finance prohibits predetermined interest on lending, excessive contractual uncertainty and financing of prohibited activities. It does not prohibit commercial return. Returns may arise from trade, leasing, asset ownership, partnership, investment management or the productive use of capital.

A conventional bond generally creates a debtor-creditor relationship. The investor lends money and receives contractual interest plus repayment of principal. A sukuk certificate, by contrast, should represent an ownership interest or beneficial participation in an asset, usufruct, service, project or investment activity. The precise rights depend on its structure.

In practice, the distinction is not always absolute. Many international sukuk are “asset-based”: the underlying assets support the contractual structure, but investors rely mainly on the issuer’s creditworthiness and purchase undertaking. Other sukuk are “asset-backed”: investors have stronger recourse to a legally transferred asset pool. The distinction affects insolvency treatment, risk allocation, disclosure, credit rating and investor recovery.

The IsDB Institute has noted that debt-oriented structures such as murabahah and ijara remain prominent in the global market and that some sukuk economically resemble conventional fixed-income instruments. This creates continuing debate over whether products meet only formal contractual requirements or also the broader objectives of Sharia. (IsDBI BLOG)

For Ethiopia, this means that “Sharia-compliant” should not be treated as a marketing label. Each issuance must clearly disclose:

the underlying assets or activities;
investor ownership or beneficial rights;
payment sources;
issuer and obligor responsibilities;
transfer and repurchase arrangements;
default and dissolution events;
Sharia approval and continuing review;
asset substitution provisions;
the consequences of a Sharia non-compliance event; and
investor recourse during insolvency.

4. Ethiopia’s existing institutional foundation

4.1 Interest-free banking

Ethiopia’s banking framework expressly permits interest-free banking. NBE Directive SBB/72/2019 established licensing and authorisation requirements for interest-free banking, while the Banking Business Proclamation No. 1360/2025 recognises an interest-free bank as a distinct regulated banking institution. NBE’s subsequent prudential directives also recognise interest-free banking assets, deposits and investment structures. (National Bank of Ethiopia)

The market has attained meaningful scale. An NBE publication reported ETB 379.11 billion in interest-free banking deposits against ETB 3.55 trillion in total bank deposits. On those figures, interest-free deposits represented approximately 10.7% of total bank deposits:

[
\frac{ETB\ 379.11\ billion}{ETB\ 3.55\ trillion}\times 100
\approx 10.7%
]

This is already large enough to justify specialised liquidity-management and investment instruments.

However, deposit mobilisation is only one side of the system. Interest-free banks must convert deposits into suitable financing and investment assets. A shortage of sovereign sukuk, corporate sukuk and Sharia-compliant money-market instruments can create an asset-liability mismatch. Banks may mobilise deposits but have limited options for placing short-term surplus liquidity or obtaining central-bank liquidity against eligible Islamic collateral.

4.2 Capital-market framework

Capital Market Proclamation No. 1248/2021 established the legal foundation for Ethiopia’s regulated securities market, including the Ethiopian Capital Market Authority, securities exchanges, public offerings and capital-market service providers. ECMA subsequently issued directives covering exchanges, public offerings, securities trading, service providers and market infrastructure. (Ecma)

The Ethiopian Securities Exchange officially commenced regulated trading in July 2025. According to ECMA, the market initially included both government securities and equities. (Ecma)

Islamic securities are not conceptually excluded from the framework. ECMA Fee Directive No. 996/2024 expressly includes sukuk within corporate bonds and defines a “Sukuk Bond” as a debt security compliant with Islamic law and Sharia principles.

This recognition is important, but it is not sufficient. A fee directive establishes administrative recognition; it does not by itself resolve the full legal architecture of sukuk. A viable issuance framework must also address:

sovereign authority to transfer or lease public assets or usufruct;
the establishment and bankruptcy remoteness of special-purpose vehicles;
trust, agency and beneficial-ownership arrangements;
tax treatment of multiple asset transfers;
registration and stamp duties;
insolvency and creditor priority;
treatment of purchase undertakings;
Sharia governance and disclosure;
listing and continuing obligations; and
central securities depository and settlement treatment.

The publicly available sources reviewed for this article did not establish that Ethiopia has completed a dedicated sovereign sukuk law, comprehensive sukuk regulation or explicit tax-neutrality framework. I therefore cannot confirm that these requirements are fully resolved.

4.3 Strategic timing

The timing is favourable. Ethiopia is simultaneously:

operationalising the ESX;
modernising banking regulation;
developing an interest-free finance strategy;
deepening government-securities trading;
strengthening its interbank market; and
introducing sustainable-securities guidance.

ECMA and ESX soft-launched a sustainable-securities framework in May 2026. This creates a potential institutional bridge between sustainable finance and Islamic finance through green, social and sustainability sukuk. (Ecma)

5. Priority products for the Ethiopian market

Ethiopia should not begin with every available Islamic product. Products should be introduced according to public-policy need, legal feasibility, asset availability, investor demand and market-infrastructure readiness.

Proposed instrument	Principal issuer or sponsor	Main policy function	Suggested priority
Short-term sovereign sukuk	Ministry of Finance/NBE-coordinated vehicle	Bank liquidity and monetary operations	Immediate
Benchmark sovereign ijara or wakala sukuk	Federal government	Infrastructure and yield-curve development	Immediate to medium term
Retail and diaspora sukuk	Federal government or public enterprise	Household and diaspora savings mobilisation	Medium term
Green and sustainability sukuk	Government, utilities and development institutions	Climate and infrastructure finance	Medium term
Corporate and project sukuk	Banks, utilities, manufacturers and infrastructure companies	Private-sector capital formation	Medium term
Sharia-compliant equity list or index	ESX/independent Sharia adviser	Equity-market participation and fund development	Immediate to medium term
Islamic investment funds and REITs	Licensed fund managers	Institutional and retail investment	Medium term
Municipal or regional sukuk	Legally authorised subnational issuers	Urban infrastructure	Later stage
Waqf-linked and social sukuk	Public, charitable and development institutions	Health, education and social infrastructure	Later stage

5.1 Short-term sovereign sukuk

The highest-priority product should be a regular programme of short-term government Islamic securities. Possible tenors include three, six and twelve months. Depending on the assets and applicable Sharia rulings, structures could include short-term ijara, salam, wakala or a hybrid asset pool.

These securities would serve four functions:

provide safe liquid assets to interest-free banks;
establish Islamic money-market pricing;
provide collateral for NBE liquidity facilities; and
permit NBE to absorb and inject liquidity without requiring Islamic institutions to transact in interest-bearing instruments.

The issuance should be regular and calendar-based. An isolated instrument would provide financing but would not create a money market.

5.2 Benchmark sovereign sukuk

The second product should be a medium-term sovereign sukuk listed on the ESX. A three-to-five-year ijara or wakala structure would be operationally simpler than highly complex partnership structures.

A government asset register should first identify assets capable of supporting an issuance. Candidate assets could include:

government office buildings;
transport infrastructure;
energy assets;
warehouses and logistics facilities;
public housing assets;
land-use or usufruct rights; and
pools of completed public assets.

The asset should be legally transferable or leasable without impairing essential public services. Investors must understand whether they have actual asset recourse or primarily sovereign credit exposure.

5.3 Green and sustainability sukuk

Ethiopia has significant financing needs in renewable energy, climate-resilient agriculture, irrigation, water systems, clean transport and sustainable urban infrastructure. These sectors are compatible with both Islamic-finance principles and sustainable-finance taxonomies.

A green sukuk would combine:

Sharia compliance;
an eligible green-project framework;
allocation reporting;
environmental-impact reporting;
external review; and
continuing disclosure.

The product should not be launched solely for branding. The government or corporate issuer must have a credible project pipeline and the capacity to report use of proceeds and measurable impact.

5.4 Retail and diaspora sukuk

Retail sukuk could mobilise household savings currently held outside formal financial institutions. Digital distribution through banks, mobile channels and licensed brokers could lower transaction costs.

A diaspora sukuk could target Ethiopians abroad, but only after resolving:

foreign-currency denomination;
exchange-rate risk;
repatriation rules;
external securities-law requirements;
investor disclosure;
payment arrangements; and
sovereign debt sustainability.

A diaspora label cannot compensate for weak financial terms. The instrument must be investable on its own merits.

5.5 Corporate sukuk

Corporate sukuk should follow—not precede—the establishment of a sovereign benchmark and reliable issuance rules. Suitable early issuers may include:

regulated banks;
utilities;
telecommunications and digital-infrastructure enterprises;
export-oriented manufacturers;
logistics companies;
leasing companies;
industrial parks; and
established real-estate or housing developers.

Potential structures include ijara for leased assets, istisna-ijara for construction, wakala for investment portfolios and musharakah for joint ventures.

Credit enhancement may be required during the market’s early phase. This could involve partial guarantees from development-finance institutions, subordinated tranches, reserve accounts or sukuk-enhancement facilities. Guarantees must be structured carefully so that credit enhancement does not eliminate the commercial risk required by the underlying Islamic contract.

5.6 Sharia-compliant equities, funds and real-estate products

Not every Islamic capital-market product requires a separate contractual structure. Ordinary shares can be classified as Sharia-compliant where the company’s activities and financial ratios satisfy an approved screening methodology.

The ESX should therefore develop:

a published Sharia screening methodology;
an official or independently administered Sharia-compliant securities list;
periodic re-screening;
procedures for income purification;
clear treatment of newly listed and reclassified companies; and
disclosure of the responsible Sharia authority.

This would permit the development of Islamic equity funds, exchange-traded funds, pension portfolios and discretionary investment mandates.

Islamic real-estate investment trusts could later channel capital into commercial property, warehouses, affordable housing, healthcare and logistics assets. Their success would depend on property-title clarity, valuation standards, rental-market data and reliable investor protections.

6. Comparative international experience

6.1 Malaysia: ecosystem development rather than isolated products

Malaysia demonstrates the importance of building Islamic finance as a parallel and integrated component of the national financial system. Its Islamic capital market includes sovereign and corporate sukuk, Sharia-compliant equities, funds, REITs, ETFs and sustainable-investment products.

In 2025, Malaysia’s Islamic capital market reached approximately RM2.7 trillion and represented about 63.7% of its total capital market. Sukuk accounted for 66.51% of total bond and sukuk issuance and 63.71% of outstanding bonds and sukuk. Corporate sukuk represented 79.3% of total corporate fixed-income issuance. (sc.com.my)

Malaysia’s principal lessons for Ethiopia are:

establish a central Sharia advisory mechanism;
maintain coordination between the central bank and securities regulator;
provide tax and regulatory neutrality;
issue sovereign Islamic instruments regularly;
support Islamic interbank liquidity; and
develop both capital-supply institutions and investable products.

Malaysia’s Islamic Interbank Money Market has operated since 1994. Its instruments include qard acceptance, commodity murabahah, government investment issues, Islamic monetary notes and collateralised murabahah. (Financial Markets)

The Ethiopian lesson is that capital-market products cannot mature while Islamic banks lack money-market and central-bank liquidity tools.

6.2 Indonesia: sovereign, retail, green and social segmentation

Indonesia has developed regular sovereign sukuk auctions alongside retail, green and cash-waqf-linked products. Its Ministry of Finance publishes sovereign Sharia-securities auction plans and maintains dedicated frameworks for government securities and green sukuk. (DJPPR)

Indonesia also uses digital retail sukuk to reach individual investors. Retail green sukuk have been linked to environmentally eligible expenditure, while cash-waqf-linked sukuk connect government securities with social-finance objectives. (DJPPR)

The Ethiopian lesson is product segmentation. A single sovereign sukuk cannot simultaneously optimise monetary liquidity, infrastructure finance, retail savings and social investment. Separate instruments should be designed for separate investor groups and policy purposes.

6.3 Saudi Arabia: predictable sovereign supply

Saudi Arabia operates a domestic Saudi-riyal sukuk programme supported by an annual borrowing plan and a calendar of local sukuk issuances. Regular issuance provides investors with supply visibility and supports benchmark pricing across maturities. (المركز الوطني لإدارة الدين)

Ethiopia does not need Saudi-scale issuance. It does need the same principle of predictability. A published auction calendar, even for modest volumes, is more valuable for market formation than irregular and opportunistic borrowing.

6.4 Bahrain: short-term liquidity instruments

The Central Bank of Bahrain has issued short-term sukuk al-salam and ijara instruments. Its programme has included monthly three-month salam sukuk and six-month ijara sukuk, providing recurring Sharia-compliant investment and liquidity-management assets. (CBB)

This model is especially relevant to Ethiopia. Bahrain’s experience demonstrates that sovereign Islamic securities can be designed for monetary and banking-system liquidity, not only long-term infrastructure finance.

6.5 Pakistan: Sharia-compliant monetary-policy operations

The State Bank of Pakistan uses government ijara sukuk as eligible instruments in Islamic open-market operations. Its framework includes mudarabah-based liquidity injection, bai-muajjal transactions and Sharia-compliant standing facilities. (State Bank of Pakistan)

The critical lesson is sequencing. Central-bank Islamic liquidity facilities require an adequate stock of eligible sovereign Islamic securities or high-quality Sharia-compliant assets. Without collateral, the facility exists formally but may have limited operational reach.

6.6 United Kingdom: legal and tax neutrality

The United Kingdom issued its second sovereign sukuk in 2021, raising £500 million through an al-ijara structure. The UK’s broader contribution was the legal and tax treatment of Islamic-finance transactions as economically equivalent to corresponding conventional products, reducing the risk of multiple taxation and unequal regulatory treatment. (GOV.UK)

The UK’s 2026 Debt Management Report stated that the 2021 sukuk was due to mature in July 2026 and that the government was not then planning an immediate replacement. (GOV.UK)

This provides two lessons. First, a non-Muslim-majority country can develop credible Islamic instruments. Second, occasional sovereign issuance does not create a deep domestic sukuk curve. Market development requires continuity.

6.7 South Africa: African domestic-market precedent

South Africa completed a USD 500 million international sovereign sukuk in 2014. In November 2023, it launched the first sovereign rand-denominated al-ijara sukuk on the African continent. The domestic transaction totalled ZAR 20.386 billion, consisted of four maturities, was listed on the Johannesburg Stock Exchange and was 1.74 times subscribed. (treasury.gov.za)

South Africa is particularly relevant because it demonstrates that an African sovereign can:

establish a dedicated trustee structure;
issue domestic-currency sukuk;
create multiple benchmark maturities;
list the securities on an existing exchange; and
attract both Islamic and conventional institutional investors.

6.8 Nigeria: visible infrastructure linkage

Nigeria has used sovereign sukuk proceeds to finance road infrastructure and provides both corporate and retail subscription channels. Its Debt Management Office maintains a dedicated sovereign-sukuk programme and publishes information on roads financed through sukuk proceeds. (DMO)

The Nigerian approach offers a politically important lesson: sukuk acceptance improves when investors and the public can identify the infrastructure financed. Ethiopia should therefore combine financial disclosure with project-level reporting.

7. Designing interest-free monetary policy for Ethiopia

Ethiopia does not require a separate macroeconomic objective for Islamic banks. Price stability, financial stability and orderly liquidity conditions remain common objectives. It does, however, require contractually distinct operational instruments.

A dual monetary-policy framework should ensure that conventional and interest-free banks face economically comparable access conditions while using different legal contracts.

7.1 Liquidity absorption

NBE could absorb excess liquidity through:

short-term sovereign sukuk auctions;
qard placements with NBE, where approved;
wakala investment facilities;
commodity murabahah placements, subject to operational feasibility; or
outright sale of eligible sukuk.

7.2 Liquidity injection

Liquidity could be injected through:

collateralised mudarabah facilities;
wakala-based investment facilities;
collateralised murabahah;
purchase and resale of sovereign sukuk; or
Sharia-compliant repurchase-type arrangements approved under the applicable national framework.

7.3 Standing facilities

Interest-free banks should have access to:

an overnight or short-term liquidity facility;
emergency liquidity assistance;
a placement facility for surplus funds; and
intraday liquidity for payment and settlement.

The pricing methodology should be transparent and economically consistent with the general monetary-policy stance. The contract should not mechanically disguise an interest-bearing loan. Product approval, legal documentation and ongoing Sharia review are therefore essential.

7.4 Eligible collateral

NBE should publish eligibility, valuation and haircut requirements for:

sovereign sukuk;
government-guaranteed sukuk;
high-quality corporate sukuk;
qualifying Sharia-compliant financing assets; and
approved pools of receivables or leased assets.

A centralised collateral registry and reliable market valuation will be necessary as the market develops.

8. Legal, regulatory and institutional reforms

8.1 Dedicated sukuk regulation

ECMA should issue a comprehensive Sukuk and Islamic Capital Market Directive, jointly coordinated with NBE and the Ministry of Finance.

The directive should cover:

eligible structures;
issuer and originator responsibilities;
SPV or trustee requirements;
asset-transfer documentation;
offering-document disclosure;
Sharia certification;
continuing Sharia review;
asset substitution;
default and dissolution;
investor meetings and voting;
related-party transactions;
financial and impact reporting;
listing and secondary trading; and
treatment of Sharia non-compliance income.

8.2 Sovereign issuance authority

Public-finance and debt-management legislation should expressly authorise the government to:

establish or sponsor a sukuk SPV;
transfer, lease or assign usufruct in eligible public assets;
make rental or purchase-undertaking payments;
issue guarantees where legally permitted;
replace assets during the life of an issuance; and
return assets at maturity without unintended disposal restrictions.

These provisions should preserve parliamentary budget authority, fiscal transparency and public-asset accountability.

8.3 Tax neutrality

Islamic transactions can involve several legal steps where a conventional loan involves one. For example, an ijara sukuk may require transfer of an asset or usufruct to an SPV, leaseback to the government and transfer back at maturity. Without tax neutrality, VAT, capital-gains tax, registration charges or stamp duties may apply more than once.

Tax policy should ensure that:

sukuk profit distributions receive treatment comparable to bond interest;
asset transfers undertaken solely for approved financing are not repeatedly taxed;
issuer deductions are economically neutral;
investors are not disadvantaged relative to bond investors;
withholding-tax treatment is clear;
non-resident investor treatment is specified; and
Sharia-compliant trade and lease structures do not incur unintended tax costs.

Neutrality does not mean granting Islamic finance preferential treatment. It means preventing contractual form from creating unequal taxation for economically comparable financing.

8.4 Sharia governance

Ethiopia should establish a two-tier Sharia governance system.

At the national level, a National Sharia Advisory Council for Financial Services should provide authoritative rulings on regulated financial products. Its membership should include qualified Sharia scholars, lawyers, accountants, economists and finance practitioners. NBE and ECMA should remain responsible for prudential and market regulation; the Council should determine Sharia matters within a clearly defined mandate.

At the institutional level, banks, fund managers, takaful operators and sukuk issuers should maintain appropriate Sharia review, compliance and audit arrangements.

The framework should draw from AAOIFI governance standards and IFSB principles. AAOIFI’s issued standards cover central Sharia boards, internal Sharia audit, sukuk governance and Sharia-compliance ratings. IFSB standards include core principles for Islamic capital-market regulation and principles for effective supervision of Sharia governance. (IFSB)

8.5 Accounting and disclosure

Financial reporting should reconcile Ethiopian IFRS requirements with relevant Islamic-finance accounting and disclosure needs. The objective should not be to create competing accounting systems, but to ensure that:

asset ownership is accurately reported;
profit, rental and agency income are correctly classified;
investment-account risks are disclosed;
asset-backed and asset-based structures are distinguished;
Sharia non-compliance events are reported; and
investors understand the substance of the transaction.

9. Market and investment implications

9.1 Potential investor base

The initial domestic investor base is likely to include:

interest-free banks;
conventional banks with Islamic windows;
pension and social-security funds;
insurance and takaful institutions;
investment funds;
high-net-worth investors;
corporates with surplus liquidity;
retail investors; and
the Ethiopian diaspora.

Conventional investors should not be excluded. A properly structured sukuk may be purchased by any investor, subject to its mandate and risk assessment. Broad investor participation improves pricing and secondary-market liquidity.

9.2 Investment rationale

From an investment perspective, Ethiopian sukuk could provide:

a new fixed-income or income-generating asset class;
portfolio diversification;
access to infrastructure and real assets;
Sharia-compliant investment opportunities;
potential environmental or social impact; and
instruments across short, medium and long maturities.

However, Sharia compliance does not eliminate ordinary investment risk. Investors remain exposed to:

sovereign or corporate credit risk;
inflation;
currency depreciation;
liquidity risk;
legal enforceability;
project-performance risk;
asset damage or replacement risk;
refinancing risk;
Sharia non-compliance; and
weaknesses in disclosure or governance.

The investment decision must therefore be based on credit quality, cash flows, legal rights, valuation and liquidity—not religious designation alone.

9.3 Foreign investors

International Islamic investors may be attracted by Ethiopia’s development-finance needs and market potential. Their participation will depend on:

currency convertibility and repatriation;
settlement reliability;
sovereign credit risk;
withholding tax;
custody arrangements;
international listing where applicable;
external Sharia endorsement;
governing law and dispute resolution; and
availability of currency-risk mitigation.

Domestic-currency issuance should be prioritised for market development and monetary-policy purposes. Foreign-currency sukuk should be used selectively and within a prudent debt-management strategy.

10. Principal risks and safeguards

Sharia fragmentation

Different scholars may reach different conclusions on tradability, purchase undertakings, asset ownership and benchmark use. Ethiopia should reduce uncertainty through national guidance while allowing documented product-level review.

Form-over-substance risk

A product may reproduce a conventional loan through unnecessary asset transfers. Regulators should require clear economic substance, genuine contractual obligations and transparent risk allocation.

Legal uncertainty

Ambiguity over SPV ownership, public assets, insolvency or investor recourse could increase issuance costs and deter institutional investors. Legal opinions should be mandatory for each issuance.

Liquidity risk

A listed security is not automatically liquid. Market makers, primary dealers, transparent pricing, repo eligibility and regular issuance are needed.

Fiscal risk

Complex structures can obscure government obligations. All sukuk payments, guarantees and repurchase undertakings should be recorded in public-debt and fiscal-risk statements.

Asset scarcity

A sovereign may have substantial assets but few that can legally or operationally support sukuk. Ethiopia should create a verified asset and usufruct register rather than repeatedly relying on a narrow pool.

Reputational risk

A disputed Sharia structure or misuse of proceeds could undermine the entire market. Independent Sharia audit, use-of-proceeds verification and prompt corrective disclosure are essential.

Capacity risk

Regulators, judges, tax officials, issuers, brokers, auditors and legal advisers may initially lack specialised experience. A market cannot be built solely by importing transaction documents prepared for other jurisdictions.

11. Recommended implementation roadmap

Phase I: Foundation — 0 to 12 months

Establish a joint Ministry of Finance–NBE–ECMA Islamic Finance and Capital Market Steering Committee.
Complete a legal and tax-gap assessment covering public assets, SPVs, insolvency, taxation, securities issuance and investor remedies.
Establish the national Sharia governance framework.
Issue a Sukuk and Islamic Capital Market Directive.
Prepare a register of eligible sovereign assets and usufruct.
Conduct formal market sounding with banks, pension funds, insurers, diaspora representatives, brokers and international investors.
Design NBE Sharia-compliant standing and liquidity facilities.
Publish an ESX Sharia-screening methodology for equities.

Phase II: Market creation — 12 to 36 months

Issue short-term sovereign Islamic securities at regular three-, six- and twelve-month maturities.
Make approved sukuk eligible for NBE liquidity facilities and regulatory liquidity requirements.
Launch a benchmark domestic sovereign ijara or wakala sukuk.
List the sukuk on the ESX and establish market-making arrangements.
Introduce an Islamic investment fund and a Sharia-compliant equity index or securities list.
Pilot a green or sustainability sukuk linked to a clearly identifiable project portfolio.
Introduce retail distribution through licensed banks, brokers and digital channels.

Phase III: Deepening — 36 to 60 months

Develop a sovereign sukuk yield curve across several maturities.
Facilitate corporate and public-enterprise sukuk.
Introduce credit-enhancement mechanisms for infrastructure and SME issuers.
Develop Islamic REITs, ETFs and pension products.
Pilot retail, diaspora and cash-waqf-linked sukuk.
Consider regional or municipal issuance after establishing borrowing controls and transparent revenue sources.
Support cross-listing and international issuance where economically justified.

12. Core policy recommendations

1. Treat Islamic finance as national financial infrastructure

Islamic finance should not be administered as a narrow religious or banking issue. It should be incorporated into financial-sector development, capital-market policy, public-debt management, financial inclusion and monetary operations.

2. Begin with sovereign liquidity instruments

Short-term government sukuk should precede an extensive corporate market. They provide pricing benchmarks, liquidity assets and central-bank collateral.

3. Establish legal and tax neutrality before issuance

A first issuance should not be used to discover unresolved legal and tax problems. Enforceability, asset-transfer authority and tax consequences must be settled in advance.

4. Introduce a predictable issuance calendar

Regularity is more important than a single large transaction. Predictable supply supports investor planning, secondary trading and yield-curve formation.

5. Coordinate NBE and ECMA responsibilities

NBE should lead prudential regulation, banking liquidity and monetary operations. ECMA should lead securities issuance, market conduct, disclosure, exchanges and funds. Joint rules should prevent regulatory gaps and duplication.

6. Create credible national Sharia governance

National Sharia rulings should be transparent, technically supported and insulated from commercial conflicts of interest. Sharia governance should complement—not replace—legal, prudential and financial review.

7. Use sukuk for identifiable productive assets

Early sovereign sukuk should finance or refinance visible infrastructure with measurable economic or social value. This improves public understanding and strengthens investor confidence.

8. Develop the full investor ecosystem

Sukuk supply must be matched by funds, takaful, pension mandates, market makers, custodians, rating capacity and investor education.

9. Protect investors through substance-based disclosure

Offering documents should explain actual risks, asset rights and recourse. Describing a product as “asset-backed” or “Sharia-compliant” should require evidence.

10. Build domestic capability

Ethiopia should use international advisers for initial transactions, but require structured knowledge transfer to regulators, local law firms, accountants, Sharia scholars, investment banks and universities.

13. Conclusion

Ethiopia has already crossed the first threshold of Islamic financial development. Interest-free banking is legally recognised, deposits have reached material scale, the Ethiopian Capital Market Authority is operational, the Ethiopian Securities Exchange has commenced trading, and a national interest-free finance strategy is being developed.

The remaining challenge is institutional integration.

A successful Islamic capital market will not emerge merely because ECMA recognises sukuk or because banks offer interest-free accounts. It requires a connected system in which:

the Ministry of Finance can issue legally enforceable sukuk;
NBE can conduct Sharia-compliant monetary operations;
ECMA can regulate issuance and protect investors;
ESX can list and support secondary trading;
tax rules are neutral;
courts can enforce transaction documents;
Sharia governance is credible;
banks and institutional investors have suitable assets; and
issuers can access long-term capital.

International experience points to a consistent conclusion. Malaysia demonstrates the value of ecosystem development. Indonesia shows how sovereign, retail, green and social products can be segmented. Bahrain and Pakistan show that sukuk and related instruments are central to Islamic liquidity management. Saudi Arabia demonstrates the importance of predictable issuance. The United Kingdom confirms the importance of tax neutrality. South Africa establishes an African domestic-market precedent, while Nigeria shows how sukuk can be linked visibly to infrastructure.

For Ethiopia, the recommended sequence is clear: establish the legal, tax and Sharia framework; introduce regular short-term sovereign Islamic securities; issue a benchmark domestic sovereign sukuk; integrate the instruments into NBE monetary operations; and then expand into green, retail, diaspora, corporate and social products.

The objective should not be to replicate conventional finance using Arabic contractual terminology. It should be to create a transparent, investable and development-oriented market that expands consumer choice, mobilises savings, finances productive assets and strengthens the resilience of Ethiopia’s financial system.

Selected institutional sources

National Bank of Ethiopia, National Interest-Free Finance Strategy Validation Workshop, 2026. (National Bank of Ethiopia)
National Bank of Ethiopia, National Financial Inclusion Strategy II.
National Bank of Ethiopia, Birritu No. 142: Monetary and Banking Sector Indicators.
Ethiopian Capital Market Authority, Capital Market Proclamation No. 1248/2021. (Ecma)
Ethiopian Capital Market Authority, Fee Directive No. 996/2024.
Islamic Financial Services Board, Islamic Financial Services Industry Stability Report 2025.
Securities Commission Malaysia, Annual Report 2025—Islamic Capital Market. (sc.com.my)
South African National Treasury, Inaugural Rand-Denominated Sovereign Sukuk, 2023.
Bank Negara Malaysia, Islamic Interbank Money Market Instruments. (Financial Markets)
State Bank of Pakistan, Sharia-Compliant Money-Market Operations. (State Bank of Pakistan)