Finance

Finance

The traditional banking system was inherited from the AngloEgyptian condominium (1899-1955). When the National Bank of Egypt opened in Khartoum in 1901, it obtained a privileged position as banker to and for the government, a "semi-official" central bank. Other banks followed, but the National Bank of Egypt and Barclays Bank dominated and stabilized banking in Sudan until after World War II. Post-World War II prosperity created a demand for an increasing number of commercial banks. By 1965 loans to the private sector in Sudan had reached £Sd55.3 million.

Before Sudanese independence, there had been no restrictions on the movement of funds between Egypt and Sudan, and the value of the currency used in Sudan was tied to that of Egypt. This situation was unsatisfactory to an independent Sudan, which established the Sudan Currency Board to replace Egyptian and British money. It was not a central bank because it did not accept deposits, lend money, or provide commercial banks with cash and liquidity. In 1959 the Bank of Sudan was established to succeed the Sudan Currency Board and to take over the Sudanese assets of the National Bank of Egypt. In February 1960, the Bank of Sudan began acting as the central bank of Sudan, issuing currency, assisting the development of banks, providing loans, maintaining financial equilibrium, and advising the government.

There were originally five major commercial banks (Bank of Khartoum, An Nilein Bank, Sudan Commercial Bank, the People's Cooperative Bank, and the Unity Bank) but the number subsequently grew. The public was dissatisfied with the commercial banks, however, because they were reluctant to lend capital for longterm development projects. Since the Nimeiri government decreed the 1970 Nationalization of Banks Act, all domestic banks have been controlled by the Bank of Sudan.

In 1974, to encourage foreign capital investment, foreign banks were urged to establish joint ventures in association with Sudanese capital. Banking transactions with foreign companies operating in Sudan were facilitated so long as they abided by the rulings of the Bank of Sudan and transferred a minimum of £Sd3 million into Sudan. Known as the "open door" policy, this system was partly a result of Nimeiri's disillusion with the left after the unsuccessful communist coup of 1971. Several foreign banks took advantage of the opportunity, most notably Citibank, the Faisal Islamic Bank, Chase Manhattan Bank, and the Arab Authority for Agricultural Investment and Development.

In addition, the government established numerous specialized banks, such as the Agricultural Bank of Sudan (1959) to promote agricultural ventures, the Industrial Bank of Sudan (1961) to promote private industry, the Sudanese Estates Bank (1966) to provide housing loans, and the Sudanese Savings Bank established to make small loans particularly in the rural areas. The system worked effectively until the late 1970s and 1980s, when the decline in foreign trade, balance-of-payments problems, spiraling external debt, the increase in corruption, and the appearance of Islamic banking disrupted the financial system.

Islamic Banking

The Faisal Islamic Bank, whose principal patron was the Saudi prince, Muhammad ibn Faisal Al Saud, was officially established in Sudan in 1977 by the Faisal Islamic Bank Act. The "open door" policy enabled Saudi Arabia, which had a huge surplus after the 1973 Organization of Petroleum Exporting Countries (OPEC) increases in the price of petroleum, to invest in Sudan. Members of the Muslim Brotherhood and its political arm, the National Islamic Front, played a prominent role on the board of directors of the Faisal Islamic Bank, thus strengthening the bank's position in Sudan. Other Islamic banks followed. As a consequence, both the Ansar and Khatmiyyah religious groups and their political parties, the Umma and the Democratic Unionist Party, formed their own Islamic banks.

The Faisal Islamic Bank enjoyed privileges denied other commercial banks (full tax exemption on assets, profits, wages, and pensions), as well as guarantees against confiscation or nationalization. Moreover, these privileges came under Nimeiri's protection from 1983 onward as he became committed to applying Islamic doctrine to all aspects of Sudanese life. The theory of Islamic banking is derived from the Quran and the Prophet Muhammad's exhortations against exploitation and the unjust acquisition of wealth, defined as riba, or, in common usage, interest or usury. Profit and trade are encouraged and provide the foundation for Islamic banking. The prohibitions against interest are founded on the Islamic concept of property that results from an individual's creative labor or from exchange of goods or property. Interest on money loaned falls within neither of these two concepts and is thus unjustified.

To resolve this dilemma from a legal and religious point of view, Islamic banking employs common terms: musharakah or partnership for production; mudharabah or silent partnership when one party provides the capital, the other the labor; 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. 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 percent of Sudanese deposits. Politically, the popularity and wealth of Islamic banks have provided a financial basis for funding and promoting Islamic policies in government.

http://www.economist.com/topics/sudan
http://www.sudantribune.com/


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