Sudan Transparency Initiative
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.
Banking Sector Islamization
In 1983, the CBOS announced the Islamization of the entire banking system, mandating all financial institutions operating in Sudan to fully comply with Islamic laws. These laws prohibited riba, an increase in wealth that is not related to engaging a productive activity, in the banking system and stipulated that banks immediately shift towards using Islamic modes of fiancé. While the financial environment was not ready to make such a sudden change, however the number of banks complying with these directive’s started to grow and the entire financial system started to adapt to the newly imposed Islamic principles, including branches of foreign banks such as Citibank. The major conceptual and practical difference between Islamic and conventional banking system is that Islamic financing does not deal in interest; rather it is based on a partnership agreement that shares risks as well as returns.
The principle of equity: This principle is the rationale for the prohibiting of predator- mined interest payments (riba) and aims to protect the weaker contracting party in a financial transaction and promote fair treatment. The principle of equity is also the basis for prohibiting excessive uncertainty (gharar) as manifested by contract ambiguity or elusive-
ness of payoff Transacting parties have a moral duty to disclose known information before engaging in a contract, thereby reducing information asymmetry; if this principle is violated, the presence of gharar would nullify the contract.
The Principle of participating: Although commonly known as interest-free financing, the prohibiting of riba does not imply that capital is not to be rewarded. Investment return must be earned for participating in the productive activity and not merely with the pas- sage of tie. Thus, return on capital is legitimized by risk taking and determined after the fact based on asset performance or project productivity, thereby ensuring a link between financing activities and real activities.
The principle of participating lies at the heart of Islamic fiancé, ensuring that increases in wealth accrue from productive activities.
The Principle of ownership: The rules “do not sell what you do not own” (for example, short-selling) and “you cannot be dispossessed of a property except on the basis of right”
mandates asset ownership before transacting. Islamic fiancé has, thus, come to be known as asset-based financing, forging a robust link between fiancé and the real economy. It also requires preservation of, and respect for, property rights, and upholding contractual obligations by underscoring the sanctity of contracts.
During the period 1989 to 2005, Islamic fiancé in Sudan was evolved into a fully integrated system with a wide range of Islamic financial institutions and products. That period wit-
nessed the establishment of the High Shari’a Supervisory Board (HSSA) in 1992, alongside many other financial institutions to improve the functioning of banks under the full-fledged Islamic banking system. These institutions include the Khartoum Stock Exchange, Deposits Guarantee Fund, Sudan Financial Services Company, Electronic Banking Services and National Agency for Export Finance and Insurance…etc. As a result, the number of operating
Islamic banks in Sudan grew to 29 banks by the end of 2005.
The main characteristic that distinguishes the Islamic banking system from other systems is that it is derived from and built on Islamic laws. In particular, the primary objective of the Islamic banking system is the development of society, not making profit. More precisely, Islamic banks should perform their role as intermediaries through combining economic, banking and social activities.
In the Islamic banking system, banks are prohibited from charging fixed or predetermined interest, but rather sharing profits and losses. This fundamental principle requires that
banks’ return on financial assets to be unknown and determined only after realizing the transactions. This means that return on capital cannot be payable regardless of the result of the productive operations.
Moreover, Islamic banks should use Shariah compliant modes of finance. Some of these modes are based on sharing profit and loss such as Mudarabah, Musharaka, Muzaraa and Musaqat…etc, while others include Ijara (leasing), free loans, deferred sale and Murabaha
(these concepts are defied in greater details below).
It should be noted that the basic premise of the Islamic Banking is that prohibiting interest reinforces the fair distributing of money in the economy and strengthens overall social welfare. In addition, it reduces the prices of the goods which would otherwise be inflated by the cost of interest. Similarly, sharing profits and losses contributes to minimizing risk and facilitates its absorption by distributing the risk between the two parties i.e. debtors and creditors.
It is worth mentioning that Islamic banking does not allow for reselling a debt with another debt even if the two debts have the same value. This stems from the Shariah view of lending as a lenient contract and one that should not be entered into for the sake of making profit.
Below is a brief explanation of key instruments of Islamic finance used by banks in Sudan.
Murabaha is considered the most common mode of finance ncé used by banks and other financial institutions operating in Sudan. In Murabaha transactions, a buyer pertains a bank
to finance a purchase at a premium over the initial price. When the buyer completes a set number of payments, including the pre-set premium, he or she takes on full ownership of the purchase
Salam and Parallel Salam:
Salam contracts are normally used to finance the purchase of agricultural products and may be subject to different interpretations. For example, in Sudan, banks assign credit risks according to the length of time before the investment is realized into cash by the bank.
The Musharaka mode of finance is based on sharing profi and loss between the parties. Musharaka transactions under Shariah are most often used for partnerships in trading
transactions such as acquisition and sale of commodities, real estate or other similar goods. The risk weighting assigned to these assets varies depending on their type.
Mudarabah is a profit-sharing and loss-bearing contract where one-party supplies funding (financier as principal) and the other provides effort and management expertise (mudarib or entrepreneur as agent) with a view to generating a profit. The share in profits is determined by mutual agreement but losses, if any, are borne entirely by the financier, unless they result from the mudarib’s negligence, misconduct, or breach of contract terms.
Qard al hasan:
In Islamic finance, the term “Qar? al hasan”, refers to a form of financial assistance to the needy to be repaid free of charge.
Ijarah (leasing) is a contract of sale of the right to use an asset for a period of tie. It is essentially a lease contract, whereby the leaser owns the leased asset for the entie lease period.
In 2005, when the Comprehensive Peace Agreement (CPA) was signed addressing the long-standing civil conflct between northern and southern Sudan, a dual banking system was adopted, allowing for an Islamic banking system in the North and a conventional banking system in the South. After the secession of South Sudan in June 2011, the Sudanese banking system has become entirely compliant with Shariah. All of the 38 banks and their 724 branches in Sudan operate in accordance with Shariah principles.
Legal Frameworks /Structures
Following independence in 1956, a currency committee was established to issue a unified Sudanese currency with a design that reflected the cultural diversity in Sudan. During this period, the government formed a committee of international experts to consider the establishment of a central bank. The British and Egyptian currencies prevailed even as the committee for Sudanese currency was established in 1956 and issued the first national currency in 1958. In 1959, the Bank of Sudan Act was passed, and the CBOS started its operations officially in 1960 as an organization with its own legal status.
In the same context and aftr a long delay, the first Banking Business (Organisation) Act 1991 was issued to regulate the banking system along with Bank of Sudan Act 1959.
According to the Banking Business (Organisation) Act of 1991 and the Bank of Sudan Act 1960, Chapter 1 Article 3, banks are allowed to perform the following:
– Banking, including receipt of cash, currency deposits, savings deposits and investment deposits;
– Providing letters of credit and of guarantee;
– Payment of checks and collection of orders, vouchers and other papers of value;
– Providing financing to customers and operations to deal in foreign ex-change;
– Any finance work as determined by the Bank of Sudan, which is not inconsistent with Shariah.
Currently, the banking system is governed by the 2002 Central Bank of Sudan Act, and the
2003 Banking Business (Organisation) Act which replaced previously mentioned acts of 1959 and 1991 respectively. The law confers on the Central Bank of Sudan (CBOS) powers to regulate and supervise the banking system.
Titles two, four, six, seven, and eight of the Banking Act, together with Regulating and Circulars, frame the powers vested in the Board of Directors of the CBOS under the Banking Act while other provisions cover the regulatory framework, in addition to the standards and regulations made by international agencies such as Islamic Financial Services Board (IFSB), Accounting and Auditing Organization Standards for Islamic Financial Institutions (AAIOFI),
Basel Core Principles (BCP), and those consistent with public interest and do not conflct with the applicable provisions of Sudanese law. Accordingly, the CBOS follows internatinal developments in regulating and supervision closely and adopts the international best practices at the earliest opportunity.
In addition to Central Bank of Sudan Act 2002, and Banking Business (Organization) Act 2003, other Acts and Regulations applicable to the banking system include:
– the Foreign Exchange Dealing Act, 1981, although a new act is under discussion in the parliament.
– the Anti-Money Laundering & Combating Terrorism Finance Act, 2014
– the Property Mortgaged to Banks (Sale) Act, 1990.
– the Sukuk Act, 1995
– the Credit Information & Scoring Agency Act, 2011
– the Payment Systems Regulation 2013 ( a new act is under discussion)
– the Deposit Guarantee Fund Act, 1996, and
– the Foreign Exchange Dealing regulation, 2013