This study examines challenges and prospect of Interest free banking services in Ethiopia with particular reference to the commercial bank of Ethiopia, Jigjiga city, Somali regional state. The study has employed descriptive research based on survey and the data are of cross sectional type. The study has used both primary and secondary data which are quantitative and qualitative in nature and have been collected through questionnaire and interview. A total of 130 sample respondents were taken through multistage sampling. The data was analyzed using descriptive statistics of mean, frequency and percentage using SPSS version 20 software. Based on the analysis of the obtained data, this research has found out the prospect of IFB are the existence of potential customer and the diplomatic advantages. In Ethiopia, there is potential customer and Ethiopian Investment framework is favorable also for investors, so these create favorable condition for the development of IFB. On the other side, the challenges to deliver IFB services as lack of Shariah advisor, lack of supportive regulatory directives, lack of awareness of customer about IFB products and absence of equity markets. In addition, unavailability of IFB service in all branches, unequal treatment of debt and equity and double taxation and lack of trust with in the bank are the main challenges customer face to utilize the products. Accordingly, the following recommendations were forwarded by the researcher aggressive promotion and marketing campaign about IFB products, provide sustainable and continuous training to build the capacity of the manpower, the bank shall increase accessibility of its products with in all branches, the bank has to have Shariah advisor, the bank should give the required attention and focus for the business and the bank has to be transparent in its IFB business undertaking, in addition government should prepare compatible regulatory framework.