Upturn of Sudan : A review of the banking sector
December 2005
With positive economic indicators and rich natural resources, foreign banks are poised to set up shop in Sudan on the heels of investors starting to roll in (hoping to capitalise on post war recovery). With a power-sharing agreement in place aimed at ending Africa’s longest-running civil war, Ruth McKee looks at how Sudan’s oil-fuelled economy is luring Gulf investors
Two new foreign banks set to be operational very soon in Sudan are Al Salam Bank and Emirates and Sudan Bank. Both are understood to have completed their IPOs, and management are understood to be working on listing on the stock markets in Sudan and the GCC countries.
Although things are looking up for the country, there is a lot of work to be done. The 21-year civil war between the mainly Muslim north and the Animist and Christian south is said to have cost the lives of two million people, displaced millions more, and has left its infrastructure in ruins.
The war-torn country is among the poorest countries in the world with an annual GDP per capita of about $400. Almost two-thirds of its inhabitants work in the agricultural sector and the rest for the government.
Even though the situation is still fragile, the government and rebels signed a peace deal in January this year. The country has the potential to benefit greatly from peace. Sudan, the largest country in Africa covering 2.5 million kilometers, has vast areas of cultivatable land, and gold and cotton. Its oil reserves in the south are ripe for further exploitation, and revenue is to be shared equally with the north. It is also one of the few remaining countries in the world to possess a huge wealth of untapped natural minerals. It has a low level of inflation, and the burgeoning oil industry should be the catalyst for its economic growth.
A number of economic policies have been identified to aid development within the country. The liberalisation of the Sudanese economy has been earmarked as a key objective, with restructuring through the privatisation of public corporations, ending the state’s monopoly of a number of production and service sectors.
A number of laws and regulations will undergo modernisation in order to further encourage investment, including the implementation of a flexible investment law.
The World Bank has also recently offered its support to the country.
The ‘Sudan Development Program’, a government initiative, was launched last month to help the country’s economic regeneration, looking to the Sudanese private sector to increase levels of competition and build relationships with global commerce.
The banking sector in Sudan is the only national system that is totally Islamic, and has been since 1992. Recently, the sector has seen rapid growth and this is expected to accelerate as economic reconstruction in the country progresses and production from Sudan’s oil fields steps up a gear. However, it is said to be heavily regulated.
After the banking system went Islamic, central bank ‘Bank of Sudan’ the established the Sharia High Supervisory Board in the Bank in 1993, to ensure that the banking operations are free of traces of usury like practices.
The Bank of Sudan continued to play its role as the bank for the central and regional governments, and for government and semi-government institutions contributing to their capital formation, keeping their accounts in both local and foreign currencies. This is in addition to its role as a lender to the government, and a lender of last resort to the banks.
The Bank of Sudan also got rid of treasury bills and government bonds, instruments on which interest rates were applied. In their place the Bank has issued financial certificates that conform to the Islamic system.
To further Islamic compliance, monetary policies are in place that cope with public trends and the National Comprehensive Economic Strategy Policy. Since the beginning of a three-year economic program (1990-1993), the Bank of Sudan carried out financing policies that aimed to revitalise the Sudanese economy.
Al Salam Bank’s, general manager, Abu Mahmoud Mohammed Khalil, has carried out research on positive indexes and consequences of financial and monetary policies of Sudan. He believes the country is one full of promise. He says the confidence of international financial institutions has been restored, in particular the International Monetary Fund. “Economic reforms have been successfully applied, and the activation of all economic sectors and other activities have caused an increase in the average growth of the industrial section to 4.6% according to the last report issued by the International Monetary Fund.”
Mr. Khalil added that the success of Bank of Sudan in maintaining a flexible exchange rate for local currency has led to the stability of its exchange rate. “Moreover, the exchange rates against foreign currencies, namely the US Dollar, have improved. The Sudanese Dinar had been stable for five consecutive years at around 250 Dinars for one Dollar, while it has recently been at 243 Dinar for the Dollar.”
He said the country has controlled its budget deficit and kept within targeted limits (1% of the total national product).
Mr. Khalil points out that until recently Sudanese banks were used to paying a rate of return on deposits, and investment certificates much higher than those paid by banks and financial institutions outside of Sudan. “The purpose was to attract the liquidity both in local and foreign currencies circulating outside the banking system, to encourage savings and turning it into real investments. This policy led to a widening of public transactions with banks and increasing awareness of savings. Consequently, banking interests, both received and paid, started to gradually be reduced, which in turn contributed to the reduction of financing cost and speeded up development projects.”
He commented that the entry of new investors in different fields has encouraged many existing international banks to expand and establish new foreign public shareholding banks.
Al Salam Bank Sudan was founded by a consortium of UAE and Sudanese investors. Hussein Mohammed Al Meeza, managing director of Al Salam Bank, said it plans to expand out of its Khartoum headquarters and create a network of branches throughout the country. All of its operations, services and products will be fully Shari’ah compliant. Mr. Meeza said it is the largest bank in Sudan. “We launched with a capital of $100 million. This is not a small amount of capital in the Sudan market.”
Elsewhere, Lebanon’s Fransabank recently announced it is to open an Islamic bank in January with capital of $26.3 million as part of its regional expansion. Its general manager Mansour Bteish, was reported as saying that in a deal signed last June, Fransabank and Kuwait’s AREF Investment Group will each control a 20 percent stake in Capital Bank Sudan, with the remaining shares owned by Kuwaiti and Egyptian investors. AREF is part-owned by Kuwait Finance House, the only Islamic bank operating in Kuwait.
The bank looks set to open with a branch in Khartoum and may expand to other cities and offer retail and commercial banking.
Meanwhile, Dubai Islamic Bank (DIB), this year, acquired 60 per cent of Sudan’s Al Khartoum Bank. The Government of Sudan had owned 99 per cent of the bank’s total shares and Sudanese investors, the remaining one per cent.
DIB will own the majority of shares in Al Khartoum Bank, Sudan’s first bank, established in 1913. DIB therefore will take responsibility for all operations and development of Al Khartoum Bank, it says with a view “to offer the best banking services in Sudan”. The bank will be known as Emirates and Sudan Bank (ESB).
Meanwhile, Dubai Islamic Bank (DIB), acquired this year a 60 per cent of Sudan’s Al Khartoum Bank. The Government of Sudan had previously owned 99 per cent of the bank’s total shares and Sudanese investors the remaining one per cent.
DIB owns the majority of shares in Al Khartoum Bank, Sudan’s first bank, established in 1913. DIB therefore will take responsibility for all operations and development of Al Khartoum Bank, it says with a view “to offer the best banking services in Sudan”. The bank will be known as Emirates and Sudan Bank (ESB).
Aref Kooheji, DIB’s executive vice-president for investment and corporate banking, who is on the general board of ESB, said, “We look at the agreement as a significant investment in a dynamic sector in Sudan. It not only represents our ownership and management of a new bank, but our commitment to invest DIB’s human, financial, and technological resources for the rapid development of the bank.”
“DIB has proven expertise in the banking sector that would be fully utilised to strengthen our presence in Sudan. It gives us great privilege to contribute to the enhancement of the banking sector in the country as well as the development of state-of-the-art infrastructure in this significant sector.” He commented that the agreement signals a new era in the banking sector in Sudan. “We will utilise the expertise of both banks and offer outstanding services tailored to different segments of the Sudanese community including individuals and companies. We will also deploy latest technologies in banking services and ensure that our processes comply with international standards.”
Al Khartoum Bank has a strong presence in Sudan. It has a network of 53 branches across the country, of which 17 are in Khartoum.
The first general assembly meeting of Emirates and Sudan Bank was held in September in Khartoum, at which Dr. Mohammed Khalfan bin Kharbash, the UAE Minister of State for Financial and Industrial Affairs and chairman of Dubai Islamic Bank, was present. Dr. Kharbash will be chairman of the new bank.
Dr Kharbash commented, “ESB, the biggest of the new Islamic financial institutions to be inaugurated in Sudan with a paid-up capital of $113.5 million and an authorised capital of $200 million, will contribute greatly to the anticipated economic growth in the country.”
The bank had completed its private placement at $85 million with strong response from investors in Sudan and the UAE, while its $28.5 million Initial Public Offering (IPO) was dramatically oversubscribed exceeding all expectations by collecting more than $224 million.
Dr Kharbash said, “ESB will offer a variety of financial solutions which are expected to meet some of the urgent funding requirements faced by Sudan in the medium and long term. The bank will also play a major role in promoting and financing projects in Sudan through the financial markets and other investment tools.”
ESB is expected to finance large organisations and companies that work in the import and export industry in Sudan, in addition to supporting various infrastructure projects in real estate, industry, sewerage and road network projects, and services fields. The bank will also contribute to rebuilding the southern areas in Sudan and other areas affected by the civil war.
He commented, “ESB will not only depend on its capital. The bank will also leverage its strong relationships with its parent organisations, to launch investment funds that would provide financial resources expected to reach $1 billion during the next few years. The bank will contribute to enhancing the performance of Sudan’s banking sector by offering a variety of advanced and innovative products. ESB will greatly benefit from the experiences of the parent banks which constitute Dubai Islamic Bank, the world’s first Islamic Bank, Abu Dhabi Islamic Bank, and Sharjah Islamic Bank.”
The Islamic Development Bank was one of the major contributors to ESB. “Shares of Islamic Development Bank constitutes ten per cent of ESB’s paid-up capital. This major contribution will allow us to cooperate with more than 50 Islamic countries,” added Dr. Kharbash.
© Banker Middle East 2005