Sudan’s Implementation of Islamic Financing

“A story of three decades’ experience

Dr. Mohamed Khair Ahmed Elzubair, Governor Central Bank of Sudan

The 2nd Islamic Banking Summit Africa (IBSA 2013)

Djibouti November: 6-7, 2013

The Structure of the Presentation The Worldwide Evolution of Islamic Finance Historical Evolution of Sudan Islamic Finance Main Characteristics of the Islamic Finance in Sudan Major Modes of Finance in Sudan Regulatory and Structural Developments Monetary Policy Instruments Fiscal Policy Instruments Sudan Islamic Insurance System Bank Deposit Security Fund Central Bank of Sudan and the IFSB Opportunities and Challenges Conclusion

The Worldwide Evolution of Islamic Finance The Islamic finance industry represents one of the fastest

growing industries across the world Its size is estimated at 1.35 trillion USD The Recent world financial crisis drew its attention towards

the Islamic financial industry and the Islamic banking in particular

Islamic Banks adherence to the Shariah Principles cushioned the impacts of the financial crisis

Islamic banking and finance is expected to continue to meet the growing needs.

The British Government has announced plans for Britain to become the first Western country to issue a sovereign sukuk, or Islamic bonds.

The Historical Evolution of Sudan Islamic Finance The starting point of the Sudan’s Islamic banking

experience dates back to the mid 1970s dually with conventional banks till 1983.

Prince Mohd Elfaisal Initiative Former president Numeiri The 1984 Civil Transactions Act required all financial

institutions operating in Sudan were required to fully comply with the Islamic laws.

the financial environment was not completely ready to absorb such an immediate shift

the entire financial system including branches of foreign banks (such as Citi Bank) started to adapt it

The Historical Evolution of Sudan Islamic Finance 1989 to 2005, the Islamic finance in Sudan was further

deepened and integrated with a wide range of Islamic financial products.

the establishment of the high Shariah Supervisory Board in 1992 to refine activities of Banks and Financial Institutions.

A number of institutions were established to support the banking system ebs, kse, sfsc, etc.

The Comprehensive Peace Agreement with the South Sudan in 2005 established the dual banking business.

After the secession of the South Sudan in June 2011, all banks and financial institutions in Sudan are working in compliance with the Sharia Laws.

The Development of the number of Banks’

21 23

26

29 29

32

35

38 39

33 35

0

5

10

15

20

25

30

35

40

45

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Num

ber

of B

anks

Total Assets and Banks’ Profits during the period’

6,112 10,435

23,144

30,650

43,108

67,050

79 88 167

306 430 430

728

912

1,143 1,177

2,395

0

500

1,000

1,500

2,000

2,500

3,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mil

lion

SD

Gs

Total Bank Assets Total Banks Profits

Main Characteristics of the Islamic Finance in Sudan

Prohibited from dealing with fixed or predetermined interest

The principle of sharing profits and losses minimizes the risk by distributing it between the two parties.

Different Shariah compliant modes of finance Established new product compatible with Sharia laws. Islamic banking does not allow for reselling the debt

with another debt

Major Modes of Finance in Sudan

Musharaka; Musharaka mode of finance is based on sharing profit and loss between the different parties

Mudaraba; in Mudaraba, the main rule governing the transaction, there is prior agreement on profit sharing between the owner (bank) and the borrower (client).

Murabaha; in Murabaha transaction, the buyer knows the price at which the seller obtained the object to be financed, and agrees to pay a premium over that initial price

Ijarah (hire-purchase); this mode of Islamic finance requires specific treatment of assets acquired for the purpose of leasing out on the basis of (hire – purchase).

Salam and Parallel Salam; Salam contracts are normally used in agricultural products

Contribution of Modes of Finance (2002 - 2012)

Murabaha 52%

Musharaka 13%

Mudaraba 6%

Salam 2%

Others 27%

Banks Deposits and Finance (2002 - 2012

7,000

12,999

18,163

22,867

30,483

3,631 4,730

6,466

9,776

12,309 13,942

16,508

20,848

25,874 27,776

39,544

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Y 2002 Y 2003 Y 2004 Y 2005 Y 2006 Y 2007 Y 2008 Y 2009 Y 2010 Y 2011 Y 2012

Mil

lion

SD

G

Finance Deposits

Regulatory and Structural Developments Establishing the High Shariah Supervisory Board in 1992 Khartoum Stock Exchange in 1994 Establishing institutions to support and improve the

performance of the banks and other financial institutions like; 1. Bank Deposits Security Fund; 2. Sudan Financial Services Company; 3. Electronic Banking Services Company; 4. The National Agency for Insurance & Finance of Exports; 5. Microfinance Unit (MFU); 6. Credit Information & Scoring Agency

Implementation of comprehensive banking reforms Setting up the Banking Regulation Act in 1991 Amending regulations governing the establishment of new

banks

Monetary Policy Instruments The Central Bank Musharaka Certificates (CMCs) which

came into existence with the effort of the Shariah Supervisory Board , Central Bank of Sudan and IMF.

Central Bank Ijara certificates (CICs); the CICs are lease-contract backed by the assets owned by the Central Bank of Sudan

Syndicated Financing; specialized syndicated funds for financing certain agricultural activities

Liquidity Management Fund; tis fund aims at improving the banks’ liquidity management through collaborative redistribution of the liquidity surpluses to finance the banks with liquidity shortages.

Fiscal Policy Instruments Government Musharaka Certificates (GMCs); he

GMCs are equity–based financial securities backed by the government shares in certain public companies

Government investment certificates (GICs); these certificates are medium-term securities, based on various contracts financed by the Ministry of Finance via the Istisna’, Murabaha and Ijara modes of finance whereby, the Ministry of Finance and National Economy acts as the originator in the issuance of these sukuk

Sudan Islamic Insurance System The Islamic insurance System in the Sudan dates back

to the year 1979. Takaful System in Sudan; One of the distinct parts

of Insurance system in Sudan is known as Takaful. It is a system of Islamic insurance based on the principle of cooperation as voluntary as mutual assistance where the risk is shared collectively by the group contributing to the Takaful against any risk

The Takaful Fund consists of the contributions paid, will be further invested by the Insurance Company on Mudarabah mode of finance through which the element of interest (usury) will be replaced.

Bank Deposit Security Fund (Sudan) The Bank Deposit Security Fund (BDSF) of the

Republic of the Sudan was established in February 1996 as an independent association having its corporate personality

The Islamic deposit insurance is therefore a Takaful practice

(BDSF) is responsible for protecting depositors, promoting savings and enhancing the stability and safety of the financial system

The objective of the BDSF is to contribute to the stability of the financial system

Central Bank of Sudan and the IFSB The Islamic Financial Services Board (IFS) was

created in 2002 to compromise the competitiveness between the Islamic financial institutions vis-à-vis the conventional counterparts, covering the issues relating to International standards.

The Central Bank of Sudan was one of the main nine founding members of the IFSB

The IFSB is hosted by Malaysia and has a wide membership base from different Central Banks, Islamic Institution and, other international financial organizations e.g. the IMF.

The main objectives of the IFSB Forester the development of the Islamic financial

industry and it is mandated to set regulatory standards for the Islamic financial sector that include banking, capital market and Islamic insurance (Takaful) sub-sectors.

Enhance cooperation among its member countries to achieve harmonization of the regulatory frameworks

Conduct researches and studies on Islamic financial industry

Create awareness program on the Islamic Finance Assist member countries to implement its standards

by conducting workshops and seminars.

Opportunities and Challenges

Basic Opportunities: attracting immense financial resources in the form of

different type of deposits conducive investment environment advanced banking technology available in Sudan e.g.

Real Time Gross Settlements (RTGS), Mobile Banking Services, Cash Cards and, ATMs.

Continuous development of new Shariah compliant financial products,

supply of suitably qualified professionals

Opportunities and Challenges (Cont’s)

Basic Challenges : Islamic capital markets are still underdeveloped which

limit the Islamic banks ability to provide finance given those resources constrains,

Concentration of finance on Murabaha on the expense of other modes of financing.

Islamic banks are unable to make use of the international financial engineering products in the areas of risk management e.g. securitization and financial derivatives

interest-free environment and the involvement of the banks with foreign correspondents or international markets

Conclusion

The Sudanese Islamic finance experience is rich of thoughts, developments and distinctive practices

The Sudan is one of three countries in the world that adopt a fully-fledged Islamic banking system and financial markets

monetary policy formulation were based on wide consultation of all stakeholders to guarantee the right implementation

At the structural level, the CBOS made several reforms and regulations to strengthen the banks financial position and performance

Conclusion (Cont’)

The Central Bank of Sudan has recently documented and published the experience of Sudanese Islamic Economy.

It was addressed into different volumes but in Arabic and in process to be translated into English language in the first stage and other languages later.

The Central Bank of Sudan is ready to circulate this experience for the benefit of both Muslim and Non-Muslim communities at a free of charge service.