Banking In Sudan
THE MOST INTERESTING FEATURE OF THE CONTEMPORARY SUDANESE ECONOMY IS ITS DIRECT PROFIT BASIS OF FINANCING. This applies to both short-and-long term bank financing, as law strictly prohibits interest.Hence, all bank financing in Sudan is either in the form of goods supply or investment, although the recently concluded peace agreement with the Sudan Peoples’ Liberation Movement allows for an interest-based credit system in the South.There are basically five different kinds of non-interest bank financing contracts:
1. Reducing Partnership (musharakah) wherein the bank invests in the project’s fixed assets under the condition that the initiator gradually buys it out. In such a contract, the bank receives proportional profit on the balance of its investment. This is medium-term financing.
2. Working Capital Financing (murabaha) is a cash investment,whereby the bank shares in the profit in proportion to its investment.Here too, the bank’s investment is temporary, until the management has bought it out. This is short-term investment.
3. Working Capital Supply (mudarib) is when the bank sells either raw materials or trade stocks to the company on credit and at a profit. This mode of financing is often used for commercial transport vehicles and other imports. The markup is determined by the payback period.
4. Production Financing (salam) entails buying future production in advance at a discounted price. The bank receives the production and sells it at a profit, not to exceed 33.33% of its investment. If the bank should sell at greater than one-third profit,it compensates the producer for the difference.
5. Contract financing (mogawala) stipulates the bank’s shares in the profit.
Government Musharakah Certificates (GMCs) are sold by BOS to finance the budget deficit. In 2000, GMCs sold at unit prices of SD500,000 (about $1,950) brought government aggregate financing against the budget deficit of SD7.676bn ($29.986 million). GMCs are backed by government holdings in companies, carry a maturity date of one year, and yield profits based on the performance of the underlying assets.
The banks also function as holding companies, establishing subsidiaries and buying shares in various companies. These subsidiaries are usually engaged in business related to the optimum performance of the bank, such as
import/export, warehousing, shipping, construction, information technology, printing, and manufacturing. Most banks also hold shares in Sudatel, the thriving telecommunications conglomerate.
The Sudanese financial sector’s modus operandi has it own rationale and though there is an academic debate over whether or not Islamic banking is more efficient than the conventional mode, at least it has attracted investment from the global leader, Citi Corp. First of all, the rationale for shrinking partnership fixed asset financing (musharkah) revolves around the fact that the bank gets directly involved in the financial management
of the business. Thus, the bank’s control over depositors’ funds upon commercial disbursements is optimized, reducing risk of loss to both the owners and users of money. Secondly, as the banks are permitted to invest in subsidiaries, they operate transporting, warehousing,shipping, and marketing facilities concerning commodities for which they finance production. Here again, risk is reduced by optimizing control over the use factors of finance.
Moreover, the bank adds additional value for itself by providing the intervening services between producer and customer.
The producer, likewise, bears less risk if the subsidiary of the bank relieves him of responsibility for marketing and related handling. Not all Sudanese banks have invested in such subsidiary facilities, but precedence has been established. Thirdly, where the bank buys goods and sells them to customers on credit at a profit, it
may secure its returns by warehousing the goods and getting involved in the wholesale marketing.
In contract financing, the bank may get involved in both purchasing and construction through its subsidiaries. In theory, the greater the bank’s investment interests in the economy, the more funds the system attracts to investment accounts, which in turn proposes raising the efficiency level of private sector financial management.
Restructuring of the banking system was completed during 2002. The Bank of Sudan (BOS) raised minimum capitalization of banks to SD3 billion (just over $11 million). Two banks, Mashreq and Blue Nile, had to merge in order to meet up with the requirements but the other banks raised sufficient funds on their own to meet the new standard. Financial Investment Bank offers technical assistance with respect to all related managerial and systematic problems involved in mergers and acquisitions. Five of the banks are subsidiaries of foreign-based institutions:
Byblos Bank Africa, Habib Bank,
National Bank of Abu Dhabi,
Blue Nile-Mashreq Bank and
Faisal Islamic Bank. El Nilein
Industrial Development Bank
Group, Bank of Khartoum,
Agricultural Bank of Sudan,
Estate Bank, and Savings &
Social Development Bank are
entirely government owned.
However Bank of Khartoum is already in the process of being floated on the Khartoum Stock Exchange, with Bank of Sudan, the Ministry of Finance and National Economy, National Bank of Omdurman, and Duty Free Stores among its
seven statutory founding shareholders; BOSwill retain 80% of Bank of Khartoum’s shares. Bank of Khartoum is the oldest and most widely spread in terms of branches of all the banks in the system. Al Baraka Bank Sudan is owned by a consortium, consisting of five other Sudanese banks–Tadamon Islamic Bank, Faisal Islamic Bank (Sudan), Al Shamal Islamic Bank, Export Development Bank, and Sudanese Islamic Bank and three foreign banks: Al Wafa Islamic Bank of Mauritania and two Malaysian banks– Bank Utama and Malaysian Islamic Bank. Salam Bank & Sudanese Egyptian Bank started operating mid 2005.
The banking system has improved gradually in recent years in terms of both services and performance. Consolidated capital adequacy increased from 5.7% in 1999, to 9% in 2000, to 12.1% in 2002 to 14% at the close of 2003.
The aggregate of capital and reserves increased by 49.7% from 2002 to 2003, indicating a very profitable year for the sector. Total bank financing increased from $307 million in 2000 to $1.125 billion in 2003, a 266% jump. Year end deposits held increased by 72% during the
Meanwhile, electronic banking services have been introduced and most banks are using state of the art operating devices. Short-term (Murabaha) financing comprised 44.7% of 2003 bank financing, up from 35.9% the previous year. Fixed asset financing (Musharaka) accounted for 23.2% of the total. Raw material supplies by banks on a credit
basis, wherein they earn a markup (Mudaraba), comprised 5.7% of total advances, amounting to $61.4 million, while bank purchases of future production in advance, wherein the banks markets the goods at a profit, contributed
4.7% to aggregate financing, amounting to $51.6 million. The high proportion of short term financing has allowed financing volumes to increase at a faster rate than deposits, while the consolidated capital adequacy situation improved.
The figures suggest a significant improvement in bank management quality. Al Baraka Bank, for example, under the management leadership of Abdallah Khairy Hamid, has increased profits by 2,602% from 2000 to 2003, bringing
net earnings of this once distressed bank up to $2.7 million. During this period, Al Baraka deposits nearly doubled from SDD7.5 billion to SDD14.7 billion ($56.1 million).
Omdurman National Bank and Sudanese French Bank (top right) compete for the position of Sudan’s leading
bank, in terms of deposit base and profitability. A public liability company, capitalized on the Khartoum Stock
Exchange [as of December 31, 2004] at $15.547 million, Omdurman National Bank enjoys strong patronage from the
ruling National Congress and its members. However, its shareholders’ equity is more than double its KSE market
ONB offers electronic banking services and has a growing branch network of 24, in addition to the head office.
Sudan French Bank, capitalized on the Khartoum Stock Exchange [as of December 31, 2004] at $11.837 million,
started out with a majority holding by France’s Société Generale de Banque, but is now more than 99% Sudanese owned, owing to failure of SGB to participate in successive recapitalization exercises. Shareholders’ equity
at the close of 2004 was the Sudanese Dinar equivalent of $14.957 million.
Other banks worth more than $10 million are Financial Investment Bank , Blue Nile Mashreq Bank, and Saudi-
Sudanese Bank. Export Development Bank, enjoying KSE capitalization of $9.197 million, against shareholders’ equity of $4.86 million, appears to be the fastest growing bank in the system.