SITUATIONAL ANALYSIS OF MICROFINANCE SUPPLY

IN SUDAN

By

Dr. Abubakr HusseinUniversity of Khartoum

Khartoum, Sudan12 November 2007

Opportunities in Sudan

Large potential demand in the North and

South

So far approximately 3-5% coverage

Commercial banks are interested andcompetent

CBOS commenced to exercise leadership

Good practice in region (MENA, SSA, )

Global good practice firmly established

Nobel prize 2006

Pieces are there, need to connect them

Key stakeholders/suppliers:

Federal Government (GNU)

State Governments (GOSS, etc.)

Local Government bodies below state level

Banking system

Insurance sector

Projects, funds, programs, schemes

NGOs, cooperatives and CBOs

Private sector

Training Institutions and Universities

Microfinance supply: State of art

Several trials in micro lending havebeen launched in Sudan during thepast few decades to extend „small‟

loans to the poor, small producersand low-income groups, includingwomen.

However, it appears that there hasbeen no conformity in approachamong the institutions undertakingthese endeavors.

Hence, microfinance, as known andpracticed worldwide does not really existin Sudan (offering financial services suchas micro loans, repeated and largerloans, consumption loans, savings,deposits, money transfers, insurance,and adopting acknowledgedperformance measurement indicators).

Most institutions and agencies involvedin this field operate mainly with a creditminimalist approach.

The degree of success achievedvaries according to the nature of theinstitution and the environment inwhich it operates.

Most micro lending to date has beenhandled by NGOs.

Since 1994, approximately 5 percentof total bank loans were allocated tofinancing the social sector, and thispercentage has gradually increasedto reach 12 percent in the Bank ofSudan‟s credit policy for 2007.

The CBOS circulars issued on this policy defined socialdevelopment as “productive families, handicrafts,artisans and „small‟ professionals”.

20 Sudanese banks are currently providing microlending services targeting craftsmen, professionalsand small producers including productive families.

Despite the differences among the banks in: volumeof lending; number of businesses financed andportfolio at risk, ratio of the value of micro lending ineach bank to its total value of lending portfolio is verylow.

Finance is made through unevenly distributedIslamic formulae: murabaha; musharaka,mudaraba and salam.

According to CBOS statistical records,the volume of micro lending hasincreased by more than 30 percent,from SDG 30 million to more than SDG40 million between 2003 and 2004.

Despite this considerable increase, todate micro lending has not exceeded 1percent of the total volume of finance ofmost banks, with the exception of theSavings and Social Development Bank,the Exports Promotion Bank, the NelienBank and the Agricultural Bank ofSudan.

Banks-based experience

Lack of exposure and training inmicrofinance facilitation and management

Procedures are conventional, not tailored tothe conditions of the poor (e.g. the clienthas to open and activate a bank accountbefore receiving a loan; clients are requiredto issue post-dated cheques forinstallments; they have to provide adequateand conventional collateral, lengthyprocedures, etc.)

Efforts depend entirely on individual bankinitiatives, not within a national policy

No unified definition of the target group or aset of unified eligibility criteria across banksor even across branches

Almost no bank targeted the poor

Most experiences, with few exceptions, were inurban or semi-urban areas

Limited experience in field work and limited linkswith grass-root organizations (CBOs) and, hence,limited coverage

Banking system is structured to serve those in theformal sector (licenses, clearance from Zakat andtaxes, land lease, banking accounts, requirementsof cheques and collateral etc.)

Little emphasis on the savings component

No allowance for consumption/emergency loans,opening up potential for diversion of funds tourgent needs.

NGOs-based experience Most are community-based They tend to have simpler procedures Can adopt flexible collaterals Some have created successful links with the formal

banking system Finance a variety of activities, i.e., not confined to the

so-called productive activities Adopt different microfinance mechanisms and

approaches, not all successful Face problems in shifting from grants to credit where

credit is newly introduced after a period of charitybased operations

Face problems of grant based operation by competingNGOs even when they have made successful transition

Are endangered by sudden phase-outs which affectsustainability

But do provide several clues to successful microfinanceoperation

Social funds experience

Most are largely or entirely grant or charity based

Those with a window for credit target membersonly, not the poor sections of the population

Share of credit is negligible in the use of socialfunds

The exception is the SDF in Khartoum state, whichhas grown over the years and refined its operationsby absorbing experiences from others

The staff of the social funds that are engaged inmicro lending have a limited exposure to best

practices and management

Development projects-based experience Adoption of an integrated development approach Achieving good results in environmental protection

and rehabilitation Using credit as a tool for poverty alleviation Forming and working with CBOs as intermediaries Achieving some success in financing agricultural

production, but varied success in IGPs Low skills, and inadequate training, in credit and

investment; Capital erosion in the earlier projects Limited impact on women, one exception is UPAP Good coordination with government counterparts High cost of research projects and management (e.g.

in the ADSs) Lack of savings mobilization Absence of consumption loans Limited targeting of the poor and of special needs.

Microfinance supply constraints Because most banks do not follow best practices in

lending, the services provided are not in conformitywith the special needs of targeted clients, andaccordingly, other applications of microfinance areunorganized.

There is a limited volume of funds earmarked formicrofinance;

Costing and pricing of lending services is a challenge; There is a lack of knowledge among microfinance

clients of the available programs, particularly in ruralareas. This could mainly be attributed to the limitedgeographical coverage.

The economic and services infrastructure is notconducive for operations in most areas of Sudan;

Poor coordination between banks; Microfinance operations are not linked with business

advisory services, BDS; Dearth of information among most banks about credit

demand in the different geographic areas.

Serving the Majority - Success Factors

Success Factors

Staff training &

incentives

Adapted

systems and

procedures

Infrastructure

close to clientsProducts specially

adapted to market

Knowledge of MF

best practices

Commitment

Source: CGAP, Commercial Banks and Microfinance (2005).

Dr. Abubakr I. Hussein

Rural Finance & Marketing Expert

abubakrhussein@hotmail.com

FAO

DFID

IFAD

AOAD

AAAID

SWECO

UNICONS

Worldbank

AFMANENA

PACT-Sudan

FSFM-Frankfurt

Ministry of Finance

Ministry of Agriculture

BOS-Microfinance Unit

University of Khartoum

Sudan Banking Academy