VZCZCXRO2771
OO RUEHGI RUEHMA RUEHROV
DE RUEHKH #1171/01 2170810
ZNR UUUUU ZZH
O 040810Z AUG 08 ZDK CTG NUMEROUS REQUESTS
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1507
INFO RUCNFUR/DARFUR COLLECTIVE
UNCLAS SECTION 01 OF 02 KHARTOUM 001171
DEPT FOR AF/SPG, AF/EPS, EEB/IFD/OMA, EEB/IFD/OIA
DEPT PLS PASS USAID FOR AFR/SUDAN, TREASURY FOR OFAC
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EFIN SU
SUBJECT: Sudanese Banking Sector: Bad Loans Persist, but Foreign
Firms See Bright Future
REF: KHARTOUM 1035
KHARTOUM 00001171 001.2 OF 002
1. (SBU) SUMMARY: On 17 July, local daily "Al-Rayaam" ran a story
outlining problems of embezzlement and bad debts in the Sudanese
banking sector, where an estimated 22% of all loans are deemed to be
non-performing. Despite successive economic reforms over the past
two decades, the volume of non-performing loans has been a recurring
issue for Sudanese banks, one which observers blame on long-standing
political interference aimed at channeling financial resources
towards affiliates of the ruling National Congress Party (NCP).
Nevertheless, over the past several years, the sector has seen large
inflows of foreign investment from the Middle East, as a result of a
booming economy and strong support from the now independent Central
Bank of Sudan. Foreign investment is likely to continue, as foreign
bankers report that the market is quite profitable and poised for
continued growth and opportunity. END SUMMARY.
ORIGINS OF THE MODERN BANKING SECTOR
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2. (SBU) On July 27, econoff met with Ali Abdallah Ali, a professor
of economics at Sudan University for Science and Technology and a
renowned banking expert, to discuss the development of the Sudanese
banking sector. According to Ali, the sector has undergone several
evolutions since Sudanese independence in 1956. First, upon
inheriting a legacy of colonial-era foreign banks, President Nimeiry
nationalized them in 1970. Soon after, he granted permission for
the establishment of the first Islamic bank, which opened the door
for numerous others. (Note: In Islamic banking, the charging of
interest is considered "riba" (usury) and is prohibited. Instead,
banking is conducted under various purchase and sale agreements or
on the basis of profit/loss sharing contracts that determine ex-post
rates of return. End Note.)
3. (SBU) Conventional (i.e. non-Islamic) banking endured until the
1984 Civil Act, which required banks to be fully compliant with
Shariah rules. Ali stated that the emergence of Islamic banks was a
welcome development to the banking system, as it attracted
considerable deposits from customers who previously were reluctant
to deal with banks they considered un-Islamic. The complete
"Islamization" of the banking sector was accomplished with the
advent of the present government in 1989, he said. (Note: In
accordance with the Comprehensive Peace Agreement, banking in the
North is to remain Islamic while the South has adopted conventional
banking. End Note.)
'POLITICAL' BANKS
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4. (SBU) Many banks were privatized during the liberalization
program begun in 1992, but according to Ali, they remained organs of
the state, specifically the NCP. He alleges that the resources of
the banking system were directed towards empowering certain
businesses and clients, who in turn made payouts to the NCP. To
enable this system of patronage, banks were stocked with Islamic
fundamentalists appointed not for their acumen but for their
loyalty, and lending guidelines were kept loose and arbitrary. But
by allowing political considerations rather than sound lending
practices to direct decision-making, banks soon became saddled with
bad loans. Ali observed that the accumulation of such loans
continues to plague Sudanese banks and impedes efforts to clean up
their balance sheets, despite an otherwise successful IMF reform
program that went into effect in 1997. In 2006, for example, severe
liquidity problems as a result of mismanagement at Omdurman National
Bank required significant government intervention. According to
Ali, Omdurman National Bank is "the army's bank."
FOREIGN DIRECT INVESTMENT
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5. (SBU) Despite these problems, over the past several years the
continuation of the IMF reform program and a booming economy have
attracted copious foreign investment in the sector from the Middle
East. In his April 2008 State of the Republic address, President
Bashir asserted that foreign investment in the banking sector over
the past two years approached $1 billion, according to a report in
the daily "Sudan Tribune." The most prominent foreign investors
include Byblos Bank of Lebanon, Al Salam Bank of Bahrain, and Dubai
Islamic Bank (DIB), which acquired 60% of Bank of Khartoum (BOK)
from the Government of Sudan (GOS) in 2005.
6. (SBU) Econoff recently spoke with Fadi Salim Al Faqih, General
Manager of BOK, on the outlook for the Sudanese banking sector. Al
Faqih, a Jordanian brought in by DIB to run BOK, explained that the
banking sector is expanding to meet the needs of the growing
economy, and the Central Bank has been quick to adapt, encouraging
reform as well as consolidation within the sector. (Note: In
January of 2008, BOK merged with Emirates and Sudan Bank, which was
KHARTOUM 00001171 002 OF 002
established in Sudan in 2005 by investors from the Gulf. As a
result, the GOS stake in BOK has been reduced to 10%. End Note.) Al
Faqih noted that despite the influx of foreign competition, profit
margins remain high at 10-12%, compared to margins of 2-3% in mature
markets. He said that while BOK is principally engaged in
commercial banking, it sees retail banking as an area of growth and
has been offering new products such as home and auto loans.
EFFECT OF U.S. SANCTIONS
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7. (SBU) Since BOK is now 90% in private (mostly foreign) hands, Al
Faqih is seeking to have it removed from the U.S. Treasury Office of
Foreign Assets Control (OFAC) list of Specially Designated Nationls
(SDNs --see reftel). He stated that while new foreign entrants
cannot compete with BOK (and its 51 branches) as local banks, they
are well capitalized and not designated as off-limits by OFAC,
giving them an inherent advantage against BOK in dealing with
multinational firms in areas such as trade finance. (Note: Based on
guidance from OFAC, Post has provided BOK with information on how to
initiate a formal request for delisting. End Note.)
COMMENT
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8. (SBU) Sudan's robust, oil-driven economic growth and the
eagerness of Middle Eastern investors to invest capital in Islamic
finance have been a boon for the country's banking sector, which
after years of mismanagement is beginning to break free from
government meddling. While the experience of Arab investors in
Sudan has been mixed overall, their experience in banking has been
largely positive, as new foreign banks have avoided the pitfalls
previously encountered by their domestic counterparts. Other
independent reports have also projected rapid growth for Islamic
banking throughout much of Africa. (See next para for additional
information.) Though OFAC's designation has limited the growth of
BOK, new foreign entrants to the banking sector remain unencumbered
and appear to be thriving. This seems to indicate that the primary
effect that U.S. sanctions have in inhibiting the growth of the
banking sector is by limiting the participation of large
multinational corporations (and the financial services they require)
in the Sudanese economy.
REFERENCE
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9. (SBU) For more on the growth of Islamic banking in Africa, see:
Islamic Finance Explores New Horizons in Africa (Moody's, March
2008.) The report asserts that the market for Islamic finance in
Africa has barely tapped its potential. It states that
"conservatively assuming that the banking entrenchment in Africa
represents an average 50% of its total GDP, the Islamic finance
market on the continent is potentially worth close to $235
billion... [Whereas] the actual depth of Shari'ah-compliant
financial intermediation in Africa was only $18 billion as of
year-end 2007." Sudan accounts for over half of Islamic finance
assets in Africa, according to the report, and is on the cutting
edge of Islamic finance there; in 2007, Berber Cement Co., based in
Sudan, issued the first ever African sukuk (Islamic bond) in a $130
million transaction for the financing of a cement project on the
Nile.
FERNANDEZ