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The government is working to ratify a new law allowing banks to be part of the trading floor at the Ethiopian Commodity Exchange (ECX) and exempting them from collecting VAT when they provide Interest Free Banking (IFB) services to clients.
The new law that targets financial institutions providing IFB has been in progress since the state giant Commercial Bank of Ethiopia (CBE), one of the two banks that introduced IFB after the National Bank of Ethiopia (NBE) issued a license, recommended the action to Sufian Ahmed Minister of Finance and Economic Development (MoFED) and made the issue known to relevant government bodies like the Ethiopian Revenue and Customs Authority (ERCA) and Ministry of Trade.
Oromia International Bank (OIB) is the other bank that is currently operating IFB. Officials at OIB said that MoFED has approached them for feedback as well.
Experts said the new law is expected to be tabled for discussions with stakeholders.
Since banks provide financing they are not expected to collect tax (VAT) from clients and they also don’t have to pay taxes on the loans they offer, financial experts said. With the IFB scheme banks are not allowed to collect interest or provide loans because this kind of banking system is mainly focused on providing equipment or financing in-kind.
“But they are not expected to collect the VAT from the client, even if they provide the product for clients. Because the aim of banks’ is financing their clients on the basis of profit earning,” experts said. The new law is expected to impose VAT only on the original price of the equipment as opposed to including the profit that banks earn when they transferred the product for clients.
“If VAT is calculated on the final price of the product that the bank transfer to the clients, the product would be expensive compared with similar products in the market,” experts said.
Ephrem Mekuria, communication manager at CBE, told Capital that the issue had been discussed within CBE when the bank launched the Islamic banking scheme that follows the precepts of Sharia law.
Ephrem said that his bank has sent a letter to MoFED informing other government offices that providing equipment via IFB scheme is to be considered as financing and not selling products like other traders.
“If banks are expected to calculate the VAT from the entire amount (from the original price and the profit that banks earn), it make them [banks] like trader or playing a trader’s role and not banking service,” Ephrem said.
“We have also recommended that MoFED table the issue for discussion,” Nuri Hussein Indhessa, acting director of the interest free banking department of OIB, told Capital. The banks’ role is financing according to Nuri, “they are not traders.”
“We expect that MoFED will amend the law in the near future,” Nuri said.
He said that OIB is now focusing on introducing the new banking scheme but in the near future the bank will expand the program and commence financing.
The other issue expected to amended in relation with the introduction of Islamic banking is to consider banks to be part of the trading actors on the exchange floor of ECX. Currently, it is prohibited for banks to be part of the trading at ECX, which is the only trading scheme for major agricultural export items like coffee, sesame and haricot beans.
In the FIB scheme banks are not allowed to provide loans for exporters that earn interest, as a result of that exporters, who want to use the Islamic banking service, would not be able to get finance to buy products at ECX.
Ephrem said that currently CBE is meeting with relevant government bodies to see possibilities that allowed the banks to get a seat at the exchange.
“That is the reason banks are now requesting that the government permit them to buy products from the trading floor and transfer for their exporter clients,” experts said.
“Stakeholders including NBE, banks, Ministry of Trade, ERCA, ECX and its authority have to hold talks on the issues before it is amended,” Nuri said.