A critical area of reform in Sudan is the country’s
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 “riba” (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 God’s 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 Sudan’s success in oil?
A: According to the wealth-sharing agreement signed in Nairobi
on January 9 as part of Sudan’s 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 don’t 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. That’s
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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