Sudan: Changing from the inside

Published: 03-MAR-05

A critical area of reform in Sudan is the countryís weak banking sector. To get a better perspective of the situation, Michael Koma spoke exclusively to Ali Abdalla Ali, a man with extensive experience in the sector. He is currently a professor of Economics at Sudan University for Science and Technology, Economic Advisor for the Khartoum Stock Exchange and private consultant for the United Nations Development Programme (UNDP) in Khartoum.

Question: Give us an overview of the banking sector in Sudan.

A: The banking system in Sudan developed with a number of faces. The first one was pre-independence, when banks were part of imperial administration in the country. They were mainly British - Barclays, National Bank of Egypt. After independence in 1960, the central bank of Sudan was established to control the depositions of the government which were mainly deposited in foreign banks.

In 1970, the banking system was nationalized as a result of political changes in the country. After the Arab-Israeli war in 1973-4, there was an attempt to privatize the banking sector, but we were introduced to an Islamic banking system. The Faisal Islamic bank was the first Sharia-based bank to open a branch in Khartoum. Before this, there was no actual policy to Islamicise the banking system. There were two systems living together, Islamic and conventional banks side by side.

In 1983, when Sharia was applied by ex-president Jaafar Mohammad Numeiri, he single-handedly decided that all banks in Sudan must operate under the Islamic system, under which interest is considered ďribaĒ (usury).

In 1984 the government enacted the civil administrative act, which prohibited the use of interest in the whole of the economy. The banking system was told to apply the Islamic formulae.

Q: What is the difference between Islamic and non- Islamic banking system?

A: You have Musharakah, or partnership for production; mudharabah, or silent partnership when one party provides the capital, the other the labour; and murabbahah, or deferred payment on purchases, similar in practice to an overdraft and the most preferred Islamic banking arrangement in Sudan. To resolve the prohibition on interest, an interest-bearing overdraft would be changed to a murabbahah contract.

If we take Musharakah, it is about a transaction based on hadith, in which God is the third partner between two people, the supervisor of a business transaction. You have to be a good believer. The whole concept of Musaraka is based on profit and loss sharing. The good thing about this is that you do not need to pay any capital. It is the bank. The conception is that all money circulating is Godís money.

Q: What was the impact on foreign investors of that shift from a conventional banking system to one based on Sharia?

A: I think the conversion was not easy. It was an Islamic banking system with traditional background. The fundamental difference between Islamic and traditional banking systems is that in an Islamic system deposits are regarded as shares, which does not guarantee their nominal value. The appeal of the Islamic banks, as well as government support and patronage, enabled these institutions to acquire an estimated 20% of Sudanese deposits. Politically, the popularity and wealth of Islamic banks have provided a financial basis for funding and promoting Islamic policies in government.

Q: Are there foreign banks operating under the Islamic system in Sudan?

A: There were Abu Dhabi National Bank and Citibank, which has since quit the Sudanese market. Most of the Sudanese banks are owned by the government.

Q: How many banks are there in Sudan?

A: At the moment there are about 26 banks with total capital of $380m. Financially they are weak. But one of the good things the central bank did in the past 15 years was that it allowed banks to carry on their business on the basis of the Basel I/II agreement. That helped a lot. It tried to enhance the capital structure of these banks. The central bank made it very clear to the banks that they have two choices: either they increase their capital to a minimum of 300bn Dinars or they merge with other banks.

Q: Was that easy?

A: It was difficult for some banks. Some were able to meet the new capital structure. Restructuring is still going on. There was a decision recently that banks should raise their capital to 600bn Dinars. I think this was motivated by the fact that with opening up of the Sudanese economy to the great extent in late 1990s, new banks started to come in. One is Al Salam bank, from the United Arab Emirates (UAE), which started with $75m in capital. But when this bank started to open up, this $75m went up by 65%. It was over-subscribed, mainly by Sudanese investors and Arabs from Gulf countries. This high subscription could be attributed to the fact that people want new banks with hi-tech capabilities.

When this over-subscription exceeded $100m, a new bank from UAE paid $200m as paid-up capital in full. So you have two banks plus Byblos Africa bank with capital of $300m, compared to the total of $380m for the other 26 banks. Sudanese banks are going to face stiff competition. The two banks are new but they are coming with huge capital, new technology, new ideas and new vision.

Q: Do expect the old banks will go bankrupt?

A: They could, but they might merge to survive. What they really need is new partners, foreign investors. I think the Sudanese banks have an advantage in their years of experience, which the new banks lack. But the new banks have new technology, capital and the ability to provide investors with guarantees.

Q: Now Sudan has got peace in the south of the country, it has paved the way for investors to explore opportunities and possibly invest. Do you think the banking sector will attract huge investment, given Sudanís success in oil?

A: According to the wealth-sharing agreement signed in Nairobi on January 9 as part of Sudanís Comprehensive Peace Agreement (CPA), it was decided that the banking system in the north will remain Islamic in nature, and in southern Sudan will adopt an interest-based banking system. These two systems in one country are problematic.

You know, some business communities in northern Sudan dislike the Islamic system. I have my own feeling about the Islamic formula; especially the musharakah could really work wonders. The agreement guaranteed the right of movement of goods, capital, service and people between the south and north. So that means those who are not content with the Islamic formula will go to the south. It is still not yet clear how Sudan will deal with two windows of banking system.

Q: Do you think the central bank of Sudan will allow a foreign bank to operate in Khartoum based on an interest rate formula?

A: Recently the governor of the bank, Dr Sabir Mohammad, made it very clear that Sudan will not allow any bank to work in the north on a conventional basis.

Q: Sudanese bankers are complaining about the current regulatory regime. How can a foreign investor cope with the hardships banks are facing?

A: Investment regulations have not stopped investments from coming to Sudan. There has been a steady flow of funds into Sudan since 1990. Since the 90s, Sudan has attracted about $9bn in investments. During the last three years, many have invested in the oil sector. Not all the investors are good, though. We donít need anybody to make sweets or curtains for us, like some Turkish companies. Investors should come for productive investments.

Q: What was the impact of US sanctions on the Sudanese banking sector?

A: I think it is not only the sanctions but also the aftermath of the September 11 has a lot to do with the slowdown in transactions. It is not only difficult for Sudan but the Arab countries too. Governments and private sectors have problems in getting funds from abroad. Foreign investors are very careful, they want to see the situation settle down before injecting money. Thatís why Sudan attracts mainly investors from the Gulf.

Q: Where is the Sudanese economy standing now?

A: Liberalisation of the Sudanese economy in 1990 has given Sudan a big push; it has attracted huge investment in the oil sector. But I think that the liberalization policy has not help a lot. It has widened the gap between the poor and the rich. The middle class in Sudan was always considered the safety valve, but today it has been wiped out completely. In Sudan today, you are either very rich or very poor.

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