Islamic Microfinance Experience in Sudanese

Banks

Dr. Gaffar A. A. Khalid

Senior Consultant Microfinance Unit

Central Bank of Sudan

ContentsContents The Emergence of Islamic Banking in The Emergence of Islamic Banking in SudanSudan

Overview of Sudanese Macro and banking Overview of Sudanese Macro and banking IndicatorsIndicators

Outreach, Performance, Profitability and Outreach, Performance, Profitability and Risk of MicrofinanceRisk of Microfinance

The Central Bank Specialized MF UnitThe Central Bank Specialized MF Unit The Salient Achievements of the StrategyThe Salient Achievements of the Strategy The Challenges and the way forwardThe Challenges and the way forward

The Emergence of Islamic Banking in Sudan

1977-1983 1983-1985 1985-1989 1989-2005 2005- present

Selected Banking and Finance Indicators

DepositsMillion dinars

Total deposit/GDP

%

Change on

deposits %

Deposits

/liabilities

%

Total financ

e

Banking finance

/GDP%

Finance/

assets%

Finance /

deposits%

1990

1650 1.5 301 67 767 7 13 48

1991

2986 7.4 316 66.6 1403 7.4 13 47

1992

9445 11 77.1 64.4 3311 10.1 22.7 35

1993

16734 9.5 40 402 5273 5.7 12.7 31.5

1994

23435 9.9 77 40.7 10073 7.7 17.5 43

1995

416419 10.1 16 40.2 14140 3.5 14 34.9

1996

67792 6.2 3.16 42 33950 3.1 21 50

1997

96753 5.3 42.7 41 41556 2.3 18 43

1998

120113 5.3 24.14 37 47383 2.1 14 39

1999

145519 5.4 21.2 35 48732 1.8 11 32.8

2000

197224 6.2 35.5 55 79224 2.5 22 40.2

2001

274188 8 39 60.2 111339 3.2 24.5 40.6

2002

363074 9.1 32 59.4 160020 4 26.2 53.2

2003

472952 10.3 30.3 59.9 294759 6.4 37.3 62.3

2004

646649 11.7 36.7 61.9 436391 7.9 41.8 67.5

2005

977595 14.6 51.2 63.88 700018 10.4 45.7 71.6

Structure of the Sudanese banking industry 1990-2005

Total number

of banks

State-owned banks

Joint banks

Foreign + Local capital

Joint banks Government+

private capital

Foreign banks

Specialized banks

Investment banks

1990 28 5 10 2 6 4 11991 28 5 10 2 6 4 11992 29 4 10 4 6 4 11993 29 4 11 5 4 4 11994 28 4 11 5 4 3 11995 27 2 11 6 4 3 11996 27 2 11 6 4 3 11997 27 2 11 6 4 3 11998 27 2 11 6 3 3 21999 26 2 11 5 3 3 22000 25 2 11 5 3 3 12001 26 2 8 9 3 3 12002 26 2 9 8 3 3 12003 26 2 9 9 3 2 12004 26 2 9 8 3 3 12005 29 2 10 10 4 2 1

Agriculture%

Industry%

Exports%

Imports%

Domestic trade %

Other sectors %

Total finance (millio

n of S.D.)

Average

23 16 18 3 14 27 124271

Sectoral Distribution of Financing (1990-2005)

Geographical Distribution of Branches Year Khartoum

%Middle

%East

%North

%West

%South

%No of

Branches

Average 32 22 13 12 17 3 584

Finance by modes of Finance by modes of financefinance

The Distribution of fund per m ethod of finance in Sudanese banking industry 1991-2005

01020304050607080

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

average

Years

Ratios

m usharakah Fund Ratiom urabahah Fund Ratiosalam Fund Ratiom udarabah fund ratioOther Fund Ratio

Modes used in Modes used in MicrofinanceMicrofinance

PLS (Musharkah & Mudarabah) PLS (Musharkah & Mudarabah) the equity participation form of finance used to finance working capital

Non PLSNon PLS Murabahah Murabahah in form of selling assets with mark-up

prices for installments, and Ijrah in form of leasing assets are being largely extended to “Productive Families”.

Salam Salam the forward purchase of assets which is being used in agrarian societies in the form of forward crop-financing

Istisna’Istisna’ and and Mugawlah Mugawlah in form of construction or manufacturing with deferred delivery of specified made-to-order assets for installments or lump sum-

OthersOthers

The Central Bank of Sudan MF Strategy

The primary objective of the strategy is to develop a framework for more effective policies supporting the delivery of a diverse range of financial services that are widely available, client responsive and reasonably priced.

The Strategy’s Cross Cutting Areas of

Intervention:A Microfinance policy environment A Microfinance institutional and regulatory framework

An infrastructure that help

No of InstallmentsNo of Installments

Dominant Type:Dominant Type:o 12 months installments12 months installmentso 18 months18 months installmentsinstallments

     

Principal financed         

Valid 11,214Missing 14,848

9,061.1075 (USD4000)

Mode 10,000.00Std. Deviation 44,361.18352

Profit Margins    

     

Statistics

Profit Margins N Valid 11,214

Missing 14,848Mean 963.4282 (10 per

cent)

Std. Deviation 5,999.71157

Insurance ValueInsurance Value 428.1042 (4 per cent)

The Central Bank Specialized MF Unit

Actively and successfully campaign to create greater public awareness of the benefits and requirements of the microfinance industry

• Link up with other government bodies as well as Non-Government organizations (NGOs) to ensure that all constraints and obstacles to access to financing by SMEs and micro-entrepreneurs are minimized, if not removed.

• Liaise freely with International Development Organizations (UNDP, IFAD, WB, IDB) and the donor community to coordinate efforts in support of the MF sector.

• The Unit acts as the intermediary between all the above stakeholders and the Central Bank.

The Achievements of the Strategy

A- Strengthening the institutional frameworks of microfinance banks and institutions

Requirement for all banks to establish dedicated

microfinance units/branches or subsidiaries.

•  Provision of institutional support and substantial capacity building to staff of microfinance institutions, grassroots and community based organization and Microfinance clients.

B- Regulation and Supervision of Bank and Non-Bank Microfinance InstitutionsLicensing to be provided in two stages after fulfilling certain criteria and conditions

Discretionary regulatory capital requirements on Discretionary regulatory capital requirements on institutional and location basisinstitutional and location basis

Banks that operate in rural areas are required Banks that operate in rural areas are required to hold relatively lower regulatory capitals to hold relatively lower regulatory capitals compared to their counterparts in urban areascompared to their counterparts in urban areas.

Federal banks, state banks and local banksFederal banks, state banks and local banks Registration (for non deposit institutions) to to be provided in two easier stages after certain be provided in two easier stages after certain criteria and conditions criteria and conditions

Non-bank microfinance institutions are Non-bank microfinance institutions are required to hold relatively low regulatory required to hold relatively low regulatory capitals compared to semi-banking institutionscapitals compared to semi-banking institutions

IncentivesIncentives Deposit Guarantee SchemeDeposit Guarantee Scheme Capacity Building ProgrameCapacity Building Programe Takaful Microfinance Guarantee Takaful Microfinance Guarantee SchemeScheme

SMDF support and facilitiesSMDF support and facilities– Capacity buildingCapacity building– ConsultanciesConsultancies– Working capital and subsidiariesWorking capital and subsidiaries– Apex organizationApex organization

C. Financing Facilities and Capital contribution

CBOS provides financing facilities, on Musharakah (risk sharing) basis, to banks and microfinance institutions in order to support them to extend finance to the rural and less developed sector and states.•  As of mid 2009, CBOS has extended USD 69 million to 8 banks and Microfinance institutions.

• Ballot Programe with Zakah Fund

•  As of now CBOS has made equity contributions in nine fully specialized microfinance institution e.g. $10million in the capital of the Family Bank

The Family BankThe Family Bank, a joint ownership between public and private sectors, was established in 2007 as a specialized bank to extend microfinance to the poor.

 .The bank’s strategy is to provide a range of tailored financial products to the poor through simplified procedures with reasonable finance costs and unconventional, flexible guarantees (e.g. social /community guarantees)

Benefiting from technical assistance provided by BRAC and financed by the Islamic Development Bank IDB, the bank was able to quickly extend its services to the less developed states of the country. (e.g. Dar four, kurdufan and Northern provinces.

The Challenges and the way forward

A- Lack of appropriate MF products and how to diversify their range

The dominance of short-term and sales-based modes of finance; murabahah (purchase and resale plus profit margin) and salam (forward crop-financing)

The outcomes are:

-  Relatively higher cost of finance, Short-term nature of financing limited to the production cycle,

-  clients are deprived from realizing potential gains at market maturity (as peak prices of their produce are normally witnessed after the harvest season).

CBOS Proposed Way Forward• Examining Non Traditional Modes of Finance Based on

Islamic Sharia Law

* Improve bank capacities to implement innovative financing modalities while observing the essence of Islamic regulations.

• Review and develop Islamic financing regulations to allow the wider application of modalities that are in line with clients’ needs and desires. i.e. Link Musharakah with that of Murabhah and Salam.

B- The challenge: Savings Practices

The currently practiced Islamic mode does not encourage saving.

CBOS proposes:o Study with a view to designing conducive modes for increasing savings

o Treat micro savings as a pool for investment funds to be operated on the basis of "Mudarabah“

oThe challenge: Lack of Collaterals

oThe challenge: Absence of institutional micro-credit guarantee systems

Formulate the right incentives to encourage formal government as well as private insurance

companies to financially and operationally support micro insurance schemes.

Consider/study the establishment of credit guarantee schemes with the purpose of sharing credit risk with banks

Consider the involvement of the Zakat Fund in supporting new insurance funds - in the form of solidarity fund - within clients’ cooperatives and networks.

Thank youThank you