MICROCAPITAL STORY: Government of Sudan Issues Directives Requiring Banks to Allocate 12 Percent of Portfolio to Microfinance

According to the Sudan Vision Daily, The Central Bank of Sudan(CBOS) has issued a circular note detailing directives regarding microfinance to Sudanese Banks. A copy of the circular was not available for this report. As part of its 2009 Central Bank Policy the CBOS has encouraged the development of microfinance aimed at social needs such as housing and agriculture, as well as the deepening of Islamic banking.

To develop and promote microfinance, the Central Bank has established a specialized microfinance unit to assume the task of encouraging and fostering microfinance activities in Sudan. The policies set for achieving this objective include requiring banks to allocate a minimum of 12 percent of their portfolios to microfinance, requiring banks to establish specialized units or departments for microfinance that must submit annual microfinance plans to the Central Bank, and requiring banks to carry out media-based microfinance awareness programs. The 2009 Policy also states that the Central Bank may establish an institution to provide guarantees on microfinance activities.

According to a recent MicroCapital story, microfinance was recognized as a priority sector for Sudan in the mid-1990s. The demand for microfinance services is substantial, however the industry currently only covers 1-3 percent of the potential market. Ninety percent of the population in Southern Sudan is estimated to be living on an income of less than USD 1 per day. Islamic values have traditionally played an important role in the operation of Sudanese microfinance, however under a 2005 peace deal to end the civil war in Sudan, only conventional banking would be allowed in the south, a deal which resulted in Islamic banks closing down rather than converting, taking USD 45 million between them.

The 2009 Policy appears to attempt to correct this problem, encouraging additional Islamic modes of finance other than Murabaha that would be compatible with a dual banking regime. According to the new policy, the profit margin on Murubaha finance must be around 9 percent, and no more than 30 percent of a bank’s portfolio can be allocated to Murubaha finance. Other acceptable modes of Islamic finance according to the bank include Musharaka and Mudaraba.

Islamic rules of finance most notably ban the use of interest, but they also require transactions be linked to real, durable assets – thus precluding speculation or short-selling. They also prohibit investment in activities deemed inconsistent with Sharia, such as alcohol or gambling, and require that contracts be mutually agreed upon and stipulate exact terms and conditions. The most widely offered Sharia compliant contract is Murabaha, or cost plus markup sale contract. According to CGAP, a microfinance policy and research organization, over 70 percent of Islamic microfinance products offered are Murabaha. Muhsaraka and Mudaraba are both profit and loss sharing schemes.

As reported in a recent MicroCapital story, Islamic microfinance is still in its infancy. According to a 2007 survey of 125 institutions in 19 Muslim countries by CGAP, Islamic microfinance had an outreach of only 380,000 customers, accounting for only one-half of one percent of total global microfinance outreach. The results of the survey, entitled “Islamic Microfinance: An Emerging Market Niche”, found that Islamic microfinance is very concentrated in a just a few countries with Indonesia, Bangladesh, and Afghanistan accounting for 80 percent of all Islamic microfinance outreach.

By Laura Anderson, Research Associate

Additional Resources:

Sudan Vision Daily: Central Bank Issues Directives Regarding Micro and Sub-micro Finance

Central Bank of Sudan: 2009 Central Bank Policy

CGAP August 2008: “Islamic Microfinance: An Emerging Market Niche”, by Nimrah Karim, Michael Tarazi, and Xavier Reille

MicroCapital Story: Malam Ahmad Dogara Advocates Islamic Microfinance Banking in Nigeria to Eradicate Poverty

MicroCapital Story: IFC Explores Investment Opportunities in Southern Sudan

Reuters: “South Sudan orders Islamic banks to leave”

World Bank: “Project Information Document: Concept Stage“