Banking System in Sudan: Political Influences and Personal Interests Breed Corruption and Lack of Transparency (1)

Sudan Transparency Initiative

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Sudan Democracy First Group (SDFG) was formed as an umbrella group of leading Sudanese independent and democratic civil society and media actors to serve as a civil society and think tank that conduct indigenous research, analysis and advocacy on human rights, development, peace and democratic transformation in Sudan.
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SDFG launched the Sudan Transparency Initiative (STI) Project in March 2015 to investigate, analyze, document and disseminate credible and reliable information about the scope and scale of corruption and lack of transparency in Sudan. The overarching objective of the project is to raise awareness, promote accountability and resistance and spur grassroots anti-corruption movements in Sudan. One of the components of the project is to commission expert consultants to thoroughly research and report on corruption and lack of transparency in specific key sectors. The banking system in Sudan sector receives considerable attention and controversy both in government circles as well as the public arena. This report is an attempt to shed light on the intricate and multifaceted structure and practices of this sector.
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This research focuses on and highlights corrupt practices that arise from the abuse of power and use of political influence for private gain in the banking system. The research also sheds light on the powerful networks linking leaders in the government with those in the banking system and how these links effectively hinder the performance of banking system in Sudan.
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From 1989 to date banks have generally not complied with CBOS regulations due to political influence. Regulatory frameworks to preserve a sound banking system and prevent corruption are almost non-existent. In addition, most banks lack the knowledge to conduct feasibility studies regarding project financing and portfolio management.
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The paper aims to analyse the banking system in Sudan, from its foundation in 1960 to date, in detail. It discusses the major differences in the banking system before and after the incumbent regime ascended to power in June 1989 through a military coup, calling itself the Salvation (Ignaz) regime (now known as the National Congress Party (NCP)), with respect to huge variances in the prevailing supervisory and regulatory frameworks. The paper also demonstrates that the Sudanese banking system lacks political, operational, and financial Independence due to frequent intervention from government and also other influential and corrupt persons in the banking business.
The paper also sheds light on the negative practices and non-compliance of various banks with Central Bank of Sudan (CBOS) regulations, circulars and guidelines. The paper gives many examples of corrupt practices and their impact on the public interest, especially the exploitation of banks’ funds and resources for the personal interests of ruling NCP executives at the expense of the public interest. However, CBOS Banking Supervision Department’s reports pertaining to mismanagement of banks General Managers’ negative
practices, corruption networks, including the misuse of depositors’ funds by the Boards of Directors (BoD) and major shareholders of banks, huge volumes of bad debts (non-performing loans), etc., are neglected by CBOS Senior Management, because of their fears from the influential executives.
The paper reveals that political intervention has significant influence on the performance of the banking system, especially on the banks’ executive decisions with respect to the extension of credit, providing finance to specific segments of society, priority in the allocation of foreign currency resources, recruitment and selection of employees, and promotion. As a result, poor persons in the general public were totally deprived of banking access as result of the prevailing inequality and discrimination.
The paper concludes by laying out a broad set of challenges currently facing the banking system in Sudan, such as ineffective policies issued of the CBOS, spread of corruption, US Sanctions, blocking access to external financing from international financial institutions (IFIs), liquidity squeezes by the CBOS, and lack of corporate governance.
The paper also provides set of recommendations to tackle these challenges, such as promoting the public’s confidence in the banking system and ensuring its stability, anti-corruption mitigating strategies, improving the correspondence banks relationships, promoting good market practices and ensure high standards of corporate governance and regulatory frameworks to prevent corruption and ensure a sound, healthy and resilient banking system in Sudan in the near future.

Introduction

Interest in the banking system in Sudan has grown significantly in recent years; sizable investments have been made by both individual businessmen and government. The banking system in Sudan is considered a major pillar of the overall financial system, and the various varieties of services they avail for the economy constitute vital inputs for conducting and fostering investment activities in virtually all the sectors of the economy.
The banking sector in Sudan is composed of 37 banks, five of which are state-owned specialized banks, 23 are joint-venture banks, some of them are owned jointly by the government and the private sector, others national- foreign banks and some are wholly owned private banks (one
of those banks is an investment bank), and nine banks are fully owned by foreigners.
From 1989 to date banks have generally not complied with CBOS regulations due to political influence. Regulatory frameworks to preserve a sound banking system and prevent corruption are almost non-existent. In addition, most banks lack the knowledge to conduct feasibility studies regarding project financing and portfolio management. They also lack the expertise or skill of analysing the financial situation of other banks which leads to low competence in setting credit lines for dealing in the interbank market. All banks rely heavily on the CBOS for their liquidity needs; the CBOS is playing the role of lender of last resort (LOLR) for injecting money into banks that face a permanent deficit in their accounts with the CBOS.
Historically, banks in Sudan measured up to the international banking practices since they had to compete with international banks that conduct business inside Sudan, such as Barclays, Credit Bank, and Citibank. These international banks had a strong financial position and solid relationships with correspondent banks all over the world and were managed by highly trained and highly qualified banking cadres. However, after 1989, banks were characterised by a very weak financial position, breakdown in relations with international correspondent banks, and lack of capital and reserves buffers. Moreover, the imposition of the of Islamic banking system impacted the performance, due to the challenges related to compliance with Shari’a rules on banking.
Experience has shown that the banking system in Sudan is not independent. The CBOS and other banks have little to no room for operational freedom under the financial liberalization model; instead they work under a model of financial restriction and institutional constraints from the government and influential bodies. Therefore, we would conclude that there is no efficient and sound banking system capable of satisfying the needs of customers in a consistent and fair way.
This research focuses on and highlights corrupt practices that arise from the abuse of power and use of political influence for private gain in the banking system. The research also sheds light on the powerful networks linking leaders in the government with those in the banking system and how these links effectively hinder the performance of banking system in Sudan.
The research also addresses the chronic problems that have infected the banking system in Sudan since the ascendance of the NCP to power in 1989, such as the recruitment of weak senior staff to fill leading positions in the banking system who can easily be influenced by politicians to execute illegal bank transactions, facilitate suspicious bank operations, and breach the restrictions and violate the policies that govern the practice of banking. In addition to spreading corruption, this practice has seriously undermined the development of the banking system.
The cases of corruption cited in this research reveal the impact of corruption on the ability of the banking system to carry out its functions.
With respect to the challenges facing the banking system in Sudan, the unilateral economic sanctions imposed by US, though lifted now, posed a significant burden that constrains the ability of the banking system to reach its full potential since their imposition in 1997.
Though lifted, the sanctions remain the main limitation of Sudan’s access to finance, sophisticated technology, international banking and electronic payment systems. The sanctions also have significant impacts on bank customers; increasing the cost of financial transactions for businesses and isolating them from the international financial system; and depriving households of remittances from relatives abroad which constitutes the largest informal safety net for the poor in the country. Moreover, the sanctions have caused a breakdown in relations with correspondent banks, which has had negative impacts on the economy, such as decelerating growth by inhibiting imports and exports. The lower imports of foodstuffs, intermediate goods, and raw materials resulted in lower domestic consumption and production; the shortage of foreign exchange contributed to the depreciation of the currency, fuelling inflation and undermining macroeconomic stability.
The research is organised as follows; Part IV provides overview of the historical developments of the banking system in Sudan, Part V sheds light on the banking system regulations and the independence of Sudan’s banking system. Part VI focuses on the challenges that face the banks’ operation and their implications. Part VII offers conclusion and recommendations.

Background Colonial Period

The banking sector in Sudan was introduced in the early years of the colonisation and expanded the use of money by opening branches of foreign banks, including; the National Bank of Egypt (1903), Barclays Bank (1913), the Turkish Ottoman Bank (1949), the Bank of Egypt branch (1953), and the French bank Crédit Lyon (1953). These banks dominated banking in Sudan, and by the end of the colonial system there were 38 branches in different cities across Sudan.

Post-Independence Period

After the independence of Sudan in 1956, the immediate priority was to establish a central bank. A commission of experts from the United States’ Federal Reserve worked with the Sudanese government to create the Law of the Bank of Sudan in 1959, and in February 1960 the Central Bank of Sudan began its operations. The main responsibilities of the CBOS included the issuance of the national currency, formulating monetary and finance policies, building a strong, efficient and effective banking sector, maintaining government accounts, and providing foreign currency for government development projects.
Following the establishment of the CBOS, many banks were also established, and the Sudanese Pound started to circulate. A number of new banks were established, including specialised development banks such as the Agricultural Bank (1957-1959), the Sudan Industrial
Bank (1961), the Real Estate Bank (1967), and the Sudan Commercial Bank (1960).
A major development with lasting effects on the banking system in Sudan was the nationalization of foreign banks between 1970 and 1975. Nationalisation was followed by a policy of restructuring and merging banks. This policy was reversed in 1975-76 by allowing foreign banks to open branches in Sudan.
Another major development in the Sudanese banking system, was the introduction of Islamic finance in Sudan in 1977, when the first full-fledged Islamic bank, Faisal Islamic Bank, was established. Following the establishment of Faisal Islamic Bank, the government opened five more Islamic banks between 1980 and 1983. This trend of Islamic finance continued when the CBOS, started a policy to Islamise the entire banking system in 1983.

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