Sudan: Lifeline for the banking sector

Sudan, one of the largest countries in the heart of Africa, has been struggling to stay afloat economically since the US imposed crippling trade and investment sanctions in 1997. The country also lost is main revenue source, oil, following the secession of South Sudan in 2011. In this comprehensive analysis, Johan Burger examines the status of the country’s financial sector and what it needs to do to keep pace with developments in the rest of Africa.

Despite the lack of accurate statistics on Sudan’s total loss due to the US sanctions, Sudanese sources estimate it at around $500bn, with an indirect loss estimated at about $4bn annually. The US sanctions included a ban on all kinds of commercial and financial dealings with Sudan. The Sudanese banking sector was therefore effectively cut off from the global financial system.

The sanctions not only severely damaged the Sudanese economy, they also included the freezing of more than $7m belonging to the banking sector in Sudan. The sanctions have caused heavy losses to foreign investors in Sudan, and added additional restrictions for exporters in commercial transactions. The sanctions also led to a loss of trust between Sudan and financial institutions and donor countries, causing the country to lose predictable resources that were capable of filling in the external gap. 

In the transport sector, Sudan Airways has lost its place as a national carrier as the sanctions denied it access to spare parts and regular maintenance for planes, which caused most of its aircraft to be out of service. Sudan’s railway lost 83% of its infrastructure due to the sanctions. In the health sector, the sanctions prevented Sudan from obtaining US medical equipment and medicines, and decreased the efficiency of medical laboratories in the country. 

Prior to the lifting of sanctions, Sudan’s economy was stricken by very high inflation (31% in March 2017), a fiscal deficit of 17% in 2016 and the sixth-worst ranking in Transparency International’s Corruption Perceptions Index. In 2011, South Sudan seceded from Sudan, costing the country 75% of its oil reserves, estimated at 3.5bn barrels. In 2014, the US tightened sanctions and levied a fine of $8.9bn against BNP Paribas for illegal dealings with Sudan. The US decision to lift economic sanctions on Sudan last year constituted a turning point in Sudan’s foreign relations, marking its return to the world trade and financial system.

The lifting of the sanctions could enable Sudan to restore its trade and economic relations and facilitate banking operations and procedures for exports and imports. It would also ease access to commodities, basic production inputs, as well as health and education services. In addition, the country will now be able to resume its communication with international financial and investment institutions, particularly for the Sudanese private sector. The lifting of the sanctions represents a new shift in commercial transactions, both for exports and imports. It will also contribute to improving the exchange rate of the Sudanese currency. The private sector could be the biggest beneficiary as there would be to greater access to financial sources to obtain funds.

The decision to lift sanctions will have a positive impact on the production sectors in Sudan. The agricultural sector represents the main production base of Sudan’s economy, and will benefit from greater access to spare parts, fertilizers, seeds and modern technologies, which will increase the productivity and exports. It will also boost the competitiveness of Sudanese agricultural products in foreign markets. 

According to the Central Bank of Sudan (CBoS), it was only in October 2017, after the US lifted its trade sanctions, that the country began receiving foreign currency inflows. It confirmed the receipt of international transfers in US dollars to two Sudanese banks, in what was the first signal of the recovery of Sudan’s economy. The country is hopeful that through helping it to regain access to global financial markets, the lifting of sanctions could help draw in badly needed investments and raise the prospects for a recovery of Sudan’s economy.

Sudan’s financial services sector

Sudan’s financial sector continues to be dominated by banks operating under Islamic modes of finance and was composed of 37 banks at the end of 2016. Equity injections to recapitalise weak banks have led to the CBoS and the government fully or partially owning 41% of the banks. Sudan is characterised by weak financial inclusion and depth, which can severely undermine the mobilisation of savings and the reduction of poverty. Credit to the private sector dropped by 52.3% to 6.7% of GDP at the end of 2016 from the maximum score in 2012. The absence of an interbank market has led to persistent excess reserves. However, the CBoS is in the process of developing an effective Shariah-compliant liquidity management instrument.

Sudan’s stock exchange and insurance sectors are small, with the Khartoum Stock Exchange being the principal market for stock exchange dealings in the country. Nonetheless, the online trading system introduced in March 2016, with African Development Bank (AfDB) support, is expected to enhance domestic resource mobilisation, such as sukuk bonds, on which Sudan heavily depends for financing infrastructure and social services. 

Though Sudan’s banking system is still weaker than its sub-Saharan African counterparts, it continues to improve. Return on assets is high (4% at the end of 2015); and banks’ overall capital adequacy ratio was 18.7% at the end of 2015, well above the minimum requirement of 10%. The asset quality continues to improve with the ratio of non-performing loans to total loans trending downwards and reaching 5.1% at the end of 2015, compared to 7.1% the previous year.

The easing of US sanctions should enable the CBoS to strengthen the hard-won framework for anti-money laundering and combating the financing of terrorism. The recovery in correspondent banking relationships should boost private sector activities and enhance access to financial services, especially by the most vulnerable, through remittances, export receipts, and import financing. 

Going further back in time, economic, social, and human development prospects in Sudan have significantly improved since the signing of the Comprehensive Peace Agreement (CPA) in 2005. However, conflict continues between the central government in Khartoum and rebel groups in the rural west (Darfur). Poverty remains widespread and social services are inadequate to meet the needs of the vast majority of the population. Sudan’s financial system, while experiencing substantial growth in recent years, remains small relative to its regional peers. Intermediation is low, the equity and foreign exchange markets are shallow, and non-bank financial markets and institutions are small and underdeveloped. 

Still, the banking sector forms the backbone of Sudan’s financial system and is the primary source of funding for the domestic economy. Public banks dominate the sector and account for around 50% of total banking sector assets. Systemic risk is estimated to be low, largely due to low levels of intermediation and the sector’s small size and relative isolation from global financial markets. Despite recent growth in the banking sector, Sudan continues to be under-banked, as most banking and financial institutions are concentrated around the Khartoum area. Only a small share of the population has access to banking services, and enterprises often face difficulties in obtaining funding from banks or capital markets.

In efforts to increase access to finance, the CBoS established a microfinance unit in 2007 and has, since 2009, required all commercial banks operating in the country to have established microfinance offices and allocate 12% of total loans to microfinance lending operations. The CBoS also introduced the Private Sector Development Project in 2009, which offers grants to prospective entrepreneurs via a business plan competition. 

Improving banking performance

About a decade ago, authorities embarked on a series of reforms to strengthen the financial system and improve the performance of the banking sector.

Supervisory and legal and regulatory frameworks were improved, particularly in the areas of corporate governance, risk management, and provisioning. Restructuring processes were also implemented for two banks, including the Omdurman National Bank, to improve their financial position.

Sudan’s fixed income market is based on Islamic Shariah fundamentals. Government Musharaka Certificates and Government Investment Certificates, similar to conventional treasury bills and government bonds, as well as Central Bank Igarah Certificates (additional Islamic certificates), are regularly issued by the Ministry of Finance and National Economy. As of April 2011, Sudan received no long-term sovereign rating by any of the three major credit rating agencies.

A corporate bond market is also present but, as of mid-2010, only three corporate entities have been issuing debt instruments. The primary market, largely composed of the Sudan Financial Services Company (Ltd) (which markets and trades all government securities), does not feature a minimum competitive bidding amount and, instead, imposes restrictions on purchasing amounts when demand exceeds available supply.

Security instruments are also traded on the Khartoum Stock Exchange, and around 40 brokerage firms operate in the market. Secondary market activity is limited to over-the-counter trades, and is largely dominated by government securities.

Access to securities markets is open to local and foreign investors, including banks, corporate entities, financial institutions and individuals, with the exception of Igarah Certificates that are restricted to banks.

The insurance sector in Sudan is small and penetration is limited. Factors contributing to low levels of penetration include low per capita income, a missing middle class, political instability, and the prevailing rate of financial illiteracy.

The state is heavily involved in the sector: it accounts for some 40% of total insurance market premiums and owns the largest company, Sheikan. Even though the authorities have strived to upgrade the regulatory framework, most of the insurance market still does not comply with principles set by the International Association of Insurance Supervisors (IAIS), and the powers of the Insurance Supervisory Agency (ISA) are relatively weak.

As for corporate banks, the Bank of Khartoum is the largest bank in Sudan.

According to the CBoS, there are currently 34 banks in Sudan. Of these, there are a number of foreign banks, which include the following: 

• Abu Dhabi National Bank

• Qatar National Bank

• National Bank of Egypt (Khartoum)

• Aljazeera Sudanese Jordanian Bank

• Sudanese Egyptian Bank

• Saudi Sudanese Bank

• Byblos Bank (Africa)

Commercial banking sector

The commercial banking sector in Sudan is weak and small by international standards. In addition to the commercial banks, the CBoS plays an active and sometimes a very direct role in financing the economic activities in the country. It strictly controls and directs the commercial banks through pervasive interventionist policies.

There is hardly any non-bank financing sector in Sudan; in 2015 only two leasing companies operated in the country, mainly in the field of equipment leasing. The big commercial banks almost never financed such endeavours in the extractive industries, with the exception of a few who have entered the field of gold prospecting as investors. Constrained by their lack of size and the restrictive credit policies of the CBoS, there is hardly any financing role in the prospecting field for oil, gas and mineral activities.

The Sudanese banks have no capital sharing in any of the oil and gas blocks or concessions. These are financed by the foreign investors through production sharing agreements (PSA) in consortia of three or four foreign companies, the government being one of them with free carried shares held by Sudapet on behalf of the Sudan government. The PSAs seem to work to the satisfaction of both parties. This is manifested by the foreign parties undertaking other associated activities like financing the building of pipelines and refineries and not only prospecting for oil.

By the end of 2015, the local banking sector played no role in the financing of oil and gas prospecting; instead they banks were content with providing traditional banking services to some of the local contractors serving the oil industry. These included providing bank guarantees, letters of credit and sometimes murabaha (cost-plus) financing for equipment and machinery needed for effecting some contracts. In financial terms, this comes a distant second to the sums spent on oil and gas prospecting and infrastructure.

Mining is a relatively recent activity in the country. With a single notable exception, the local banks were never persuaded to finance prospecting operations. They focused on financing, on a murabaha basis, some of the needed equipment and machinery and have yet to provide export facilities or services. The CBoS can initiate and participate in investment funds to undertake mining for minerals or oil. It can persuade or reward banks who finance prospecting, which is a risky business.

The Ministry of Finance can give guarantees and assured rebates on money spent on oil, gas and mining prospecting. This is done in most countries of the world. The ministry’s perspective is that Sudan should develop the requisite policies to avoid its extractive industries from falling into foreign hands. Sudanese banks had opened branches in Arab, Asian and European countries to allow the easy movement of hard currency and to re-establish banking relations in anticipation of the decision by the US to permanently lift economic sanctions.

Agreements had been reached to restore links with international banks, especially in the UAE, Germany, and Belarus. For investments to flourish, it was essential that workable financial exchange systems were in place. The United Arab Bank had approved the Bank of Khartoum’s final licence to practise banking and open branches in the UAE. An exclusive brokerage group of US companies in Sudan and the Middle East had given approval for hard currency transfers to be facilitated through Sudan’s Agricultural Bank.

The approval by US banks of hard currency transfers, especially in dollars, will largely result in a revitalisation of the trade between Sudan and the US, as well as enable American investment in Sudan, particularly in agriculture and mining. This still seems to be future music, as there is currently very little evidence of such trade between Sudan and the US.

In July 2017, the Bank of Khartoum, which already has a branch in Bahrain for hard currency transfers, received a long-term AA rating and a short-term rating with a stable outlook from the International Islamic Rating Agency. According to Yacoub Al-Alem, head of the Corporate Banking Group of the Bank of Khartoum, in 2016, in terms of finance, corporate clients in Sudan enjoyed a broad range of well-structured Shariah-compliant products. Islamic finance products in Sudan are considered to some of the most diverse among countries with predominantly Shariah-compliant banking practices.

Electronic transactions lagging

In terms of non-finance products and in particular, cash management and electronic transactions, the banking sector in Sudan still needs considerable development and improvement. This would include the following: 

• Enhancing the existing electronic infrastructure to allow straight through-payment processing between banks – is a crucial requirement. 

• Developing flexible cash management products to meet the increased volume of bank notes caused by monetisation of the deficit. 

• Improving corporate customer services to meet the increasing expectations of corporate clients.

As the banks are aware of these challenges, they have started to address them. There is still a lot of work to be done. The Bank of Khartoum adopted a number of strategies at the time to deal with these issues. Their key strategies in financing government infrastructure include developing deep relationships with key people at federal and state level. The bank also played a pioneering role in the developing and marketing of sukuk in Sudan, which are essential instruments for infrastructure finance.

Some of the challenges in financing such products include the substantial budget deficits and debt burdens at federal and state levels, limiting the ability of the government to raise additional finance. There were also limited opportunities to diversify project risk as a limited number of syndications were executed. High interest rates also rendered many long-term projects unprofitable. 

Opportunities in agriculture finance

The Bank of Khartoum believes that there will be great opportunities in agricultural finance over the next few years. The agricultural and livestock sector is benefitting greatly from the devaluation of the Sudanese pound and the resulting enhanced competitive positioning of agricultural exports in foreign markets. They plan to get involved in financing all stages of the value chain, from farming activities, warehouse financing to industrial processing and pre-export finance. Their focus is not only on financing large agribusiness and trading companies, but also includes the financing of communities and small farms through microfinance and commercial finance for the youth simultaneously.

Currently, the Bank of Khartoum declares it offers “well-structured and customized finance solutions needed to facilitate management of working capital and expenditure, including: Mudaraba, LC Against Mudaraba, Musharaka (Partnership), Qard Hasan (Grant), Istisna/Mugawala (Made to order), Salam (Purchase with deferred delivery), Ijarra (Leasing), Murabaha (Cost-plus sale), Bai’ Muajjal (Deferred Sale).”

With its large number of correspondent banks and its international branches in both the Kingdom of Bahrain and the United Arab Emirates, the Bank of Khartoum’s corporate clients have the capacity to transfer funds globally. The Islamic Trade Finance Corporation (ITFC) from Saudi Arabia creates tailor-made Shariah-compliant solutions. In this way, ITFC has managed to harness a diversified portfolio with sugar as one of the major commodities. It lent its support to the private sector in Sudan by financing a significant sugar deal, which helped in advancing the private sector’s role through a sustained commitment to improve access to value-added and competitive financing.

The ITFC was able to design the first co-financed operation provided by the Islamic Development Bank Group (IDB) to the private sector in Sudan. By extending such financing to Sudan, ITFC supported the sugar manufacturing industry in order to get Sudan recognised once again as the biggest and the only sugar exporter in the region. The ITFC has not only creatively designed this operation; it has also supported, along with the other co-financers, the biggest agri-industrial company in Sudan, and by this, the co-financiers supported the agricultural sector (representing 27% of Sudan’s GDP), as well as the industrial sector (representing 36% of Sudan’s GDP). The ITFC believes that this financing operation is a step forward on the way of its strategies to support and develop the economy of Sudan. However, in spite of signs of improvement and despite the US ending a trade embargo, banks across the world still seem wary of working with Sudan.

Mobile financial services

Mobile financial services took off in East Africa more than a decade ago. In Sudan, however, it took quite a bit longer before this phenomenon entered the market. In August 2014, Zain Sudan launched Sudan’s first mobile financial service, called ‘Hassa’, in partnership with the Bank of Khartoum. The service allows all Zain customers in Sudan to complete a wide range of financial transactions and operations, including money transfers and various other transactions, such as paying bills and withdrawing cash from ATMs without the requirement of opening a bank account. The Hassa service will be made available in 95% of Sudan’s populated areas and will provide many benefits for the users specifically and the Sudanese society in general.

The Sudanese government supported this venture, as the extension of financial services to the unbanked in Sudan would have a significant impact on the economic development and social enhancement of many communities across Sudan. In addition, the CBoS supported the initiative given the envisaged economic and social gains that are likely to accrue from extending banking services to the unbanked, as well as for the potential to attract more national savings through formalised channels.

In order to improve the efficiencies of Hassa, RedCloud’s ICENI platform, a customisable solution for m-commerce, was contracted to provide Hassa customers with access to essential financial services. These would include the easy transfer of money, doing cash-in and cash-out transactions, and the tracking of accounts.  After a few months, the service has been upgraded and will offer electricity payments, mobile payments, bank transfers and the ability to purchase mobile airtime from phones. Additionally, customers will be able to use Hassa Shops or Bank of Khartoum ATMs to deposit cash and make withdrawals directly from their mobile accounts.

Conclusion

Given the lifting of sanctions against Sudan, the country offers unique investment opportunities and a welcoming business climate for the natural resources/mining industry, the agricultural industry, the livestock industry, as well as several others. Sudan is an emerging investment opportunity, offering access to one of the few untouched markets in the world. It is important for the normalisation of Sudan, however, that the US removes it from the list of countries sponsoring terrorism.

The financial services industry is important for the development of Sudan. It is clear that the banks in the sector make extensive use of Shariah-compliant products. However, there are still various challenges for the optimal functioning of the industry. One of the most serious issues is the liquidity crunch Sudan is currently facing. The scarcity of cash is causing countless challenges, amongst others the inability to fund its diplomats and embassies.

At an operational level, the development of mobile cash applications will stand the country in good stead. It will provide the means for the country to increase the number of consumers included in the formal financial system. 

Johan Burger is the director of the NTU-SBF Centre for African Studies established by Nanyang Technological University and the Singapore Business Federation.