Cablegate: Sudan: Experts Assess Manufacturing, Services, Banking

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TAGS: PGOV PREL ECON ENRG SOCI ECPS EIND SU
SUBJECT: SUDAN: EXPERTS ASSESS MANUFACTURING, SERVICES, BANKING
SECTORS

1. (U) Summary: On February 21, Alwaleed Alatabani, World Bank
(WB) Senior Financial Sector Specialist told PolEconOffs at a Donor
Economic Forum meeting that Sudan's high cost of loans and
over-reliance on collateral-based lending have stifled business
growth. In addition, corruption, non-performing loans (NPLs), the
lack of regulatory measures for the financial system, the absence
of credit bureaus or of systems for discharge of debt such as
bankruptcy also hamper the system. The government's microfinance
system is not working, in part because of interest rate caps. Uri
Mans, a researcher at the Amsterdam Institute of Metropolitan and
International Development (AIMID) said that tourism, ICT
(Information and Communication Technologies)/telecommunications,
transport and logistics are among the types of companies likely to
expand in the future because of the flow of business travelers to
Khartoum. End Summary

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Loan Costs Stifle Business Growth

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2. (U) On February 21, World Bank Economist, Alwaleed Alatabani
addressed donor country economists and economic officers gathered
for the monthly Donor Economic Forum. Alatabani said Sudan's 800
firms in the manufacturing and services sector face financing
problems due to the high cost of loans. Businesses are required to
put up 125 percent of the value of the loan in collateral to secure
financing for business operations. According to Alatabani, the
cost of finance rates highest among the key concerns of small and
medium-sized enterprises (SMEs) that want to do business in
Khartoum. As collateral-based lending prevails, firms have
resorted to financing through the private sector; this ultimately
slows growth in all sectors, he said. Another deterrent to
securing loans is the wide gap in lending rates between Government
borrowing (16-18 percent) and the rates for private enterprises
(200 percent). Alatabani reported that the financial sector
operated below par from 1998-2008. Non-performing loans (NPLs)
were the major reason for the financial sector's poor performance.
Overall, Alatabani concluded, Khartoum must improve its access to
finance, strengthen its financial institutions by establishing a
credit bureau, strengthening statistical data collection, offer
incentives to lenders who are willing to take on risks, and develop
its infrastructure, because poor transport and bus linkages prevent
matching supply and demand.

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NPLs Must Be Remedied

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3. (U) Non-performing loans (NPLs) constitute another obstacle to a
fully functional financial system. Alatabani said the NPLs need a
"bailout" in order to separate the good banks from the bad and to
create conditions that would allow recovery or write-offs of loans
in distress. The NPLs needed to be reduced through a restructuring
program to free up Bank capital for new lending. The GoNU has
begun a program to remedy the NPL problem, Alatabani added. He
said that a part of the strategy is to encourage directed lending
and to diversify financial products, which would help SMEs get
around needing collateral to secure loans.

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Regulatory Framework Needed for Financial Sector

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4. (U) The lack of legal institutions and systems for redress of
creditors such as bankruptcy laws are also an impediment to doing

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business. Sudan currently does not have credit information bureaus
or policies/provisions that give creditors the information they
need to lend. Equally importantly, he said, the GoNU needed a
review of the financial regulatory framework; for example, creation
of a capital markets authority. He said Sudan has a unique
financial structure since it is regulated by the Central Bank of
Sudan (CBoS) which also sits on the board of the Sudanese Stock
Exchange. This creates a conflict of interest for the GoNU and
therefore, Alatabani suggested, the GoNU must make some
institutional arrangement to regulate the market. The GoNU also
needed to expand on non-bank financial services such as leasing,
which would limit the requirement for collateral and allow
companies access to business resources such as tools and supplies,
he said.

5. (U) Alatabani said that corruption also plays a role in problems
facing the financial sector, particularly in the valuation of real
estate which is often assessed at three or four times its fair
market value.

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GoNU Micro Finance Program Needs Reworking

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6. (U) Adding to Sudan's financial sector woes is the GoNU's
program of strictly regulated microfinance loans (MFI). (Note:
microfinance is defined as a means of extending credit, usually in
the form of small loans with no collateral, to nontraditional
borrowers such as the poor in rural or undeveloped areas. End
Note) The GoNU directs banks to set aside a portion of their
earnings for micro finance and requires them to cap interest rates
at ten percent for these loans. Alatabani said the World Bank
estimates that a 24-26 percent rate is required to be profitable.
The GoNU's policy is therefore seen as retarding development of the
MFI sector. The private MFI sector would allow loans at market
rates without a cap. According to Alatabani, the GoNU now realizes
that the program is not working and is considering how to change
the system.

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Demand for Financial Services Under Study

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7. (U) UNDP reported it is currently embarking on a financial
sector review in the area of banking and microfinance. In
particular, it is looking at the delivery of banking services at
the state level, and banking capacity at the branch level in
Eastern Sudan. According to a UNDP representative, their initial
findings show that the GoNU's regulations are causing great losses
within the sector. The World Bank and the United Kingdom are
collaborating with the NGO, FinMark Trust to undertake a survey of
consumer perceptions of financial services and how consumers source
their income and manage their financial lives. Alatabani said the
study would show what types of financial services are needed, and
the resultant trends will serve as a guide for financial
institutions and the private sector. Alatabani said that the World
Bank and UK Department of International Development (DFID) are
conducting a separate study to look at Sudan's financial sector
from the demand side using street surveys. In addition, the World
Bank has produced a "Country Economic Memorandum," currently in the
clearance process. A subsequent "Financial Sector Review" which
incorporates sections on SMEs, leasing, and insurance will be
published in June or July. This review will cover diversification,
production, productivity of institutions and markets, South Sudan
and Darfur and regional differences.

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Sudan At Bottom of Finance, Services Rankings

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8. (U) Uli Mans, a Ph.D. candidate at the AIMID, presented
"Khartoum's Position in the Global City Network," his research
identifying Khartoum at the bottom of the international rankings in
the advertising and accountancy sectors. In addition, the research
shows that Khartoum ranks 459 out of 480 countries in the financial
sector, according to Mans' survey statistics. Combining the
services and financial sector, Khartoum ranks 380. Man noted that
if South Sudan were added, the numbers would be significantly
lower.

9. (U) Mans told the group that law firms, restaurants, travel
agencies, insurance and reinsurance firms, and photo studios are
among the top ten types of companies currently operating in
Khartoum. According to researchers, tourism, ICT (Information
Communication Technology) /telecom, transport and logistics are
among the types of companies likely to expand in the future due,
according to Man, to the steady flow of business travelers to
Khartoum. The GNU is currently promoting three sectors, tourism,
finance and telecom, for expansion.

10. (U) Comment: Sudan's potential for economic growth is obviously
stunted by its unhelpful banking policies, its lack of a strong
financial infrastructure, and U.S. and international economic
sanctions. However, Sudan's most pressing problem is not with
strengthening the banking system, but with creating one that works
for the entire country post 2011. The IMF is currently performing
a review of Sudan's banking system comprised of two banks
(Islamic/Commercial) and one central bank. The IMF will look at
how a restructured banking mechanism could work in the future.
With the coming elections and referendum, political priorities for
both the North and the South will be to decide whether Omar Al
Bashir's regime will remain in power and if there will be one or
two Sudans. Donors welcomed the upcoming World Bank, DFID and
UNDP-sponsored assessments. The United States will undoubtedly be
called upon for financial resources to help pay for the projects.
End Comment
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