International Conference on Islamic Banking and Finance in Mauritius

The Sudanese Islamic Banking

ExperienceBy/ Prof. Al SIDDIG TALHA MOHAMED RAHMA

The National Ribat University

SUDAN

Mauritius 5th-6th April 2011

1 .Preface:

Sudan, as an African Arab country, has roots in the Islamic Ideology and its pioneering in establishing Islamic Banks.

Sudan is located at the Northern Eastern part of Africa on an area of about one million square miles. Sudan is the widest African and

Arabian country, neighbored by nine countries .

According to 2010 census, the population of Sudan is estimated as 40 million inhabitants, spread over the vast territories of one million square

miles. The population annual rate of growth is estimated as 2.6% .

Sudan is endowed with ample natural resources. This includes a large area of fertile agricultural land, estimated at 210 million feddans (about

84b million hectares). The river Nile flows the country from the south to the north, making easy irrigation process. The rainfall increases towards the middle and southern parts of the country, furnishing for the existing large rainfed agricultural sector, and a large pasture base with a diverse

mix of animal wealth. Sudan is considered a major producer of agricultural crops. Sudan has a huge economic potential, a proposition

that has repeatedly been made by various observers. This economic potentiality could be looked at in terms of arable land, grazing land, water

resources, climate diversity, human resources, as well as mineral resources .

Sudan origin is traced in ancient kingdoms, with a unique feature of interaction between various cross-cultural communities, including

Muslim, Arab, and African communities. Yet, Islam has been a central feature of life for almost all the north. The majority of the population is located in the north. The north is mainly inhabited by Muslims, while the

south is dominated by Christians .

In recent history of political experience, an Islamic religious nationalist revolution lead to the Mahdist rule (1885-1898). That was followed by

the condominium rule, under the British and Egyptians (1899-1956). The country realized its independence in 1956 .

2 - Emergence of the Sudanese Islamic Banks:

The National Bank of Egypt was opened in Khartoum since the condominium period, in 1901. It obtained a privileged position as a

banker to and for the government. It was followed by Barclays’ Bank, and dominated and stabilized the banking system in Sudan. A number of

the branches of foreign banks were operating in order to look after the group of foreign traders from Egypt, England, and other countries before

independence of Sudan.

After Sudan obtained its independence, the national Sudanese government issued the Act of the Sudan Bank, which then became one of

the first operational Central Bank institutions in Africa. All of the responsibilities of the National Bank of Egypt were then moved to this new institution. Other three national Sudanese banks started operation, beside the agricultural bank of Sudan and the Industrial Bank of Sudan .

An active Islamic movement emerged in Sudan. Its good contacts with other Islamic movements stood before Islamization progress in Sudan,

and the views and culture of the whole Islamic momentum .

In 1968, Omdurman Islamic University established the first Islamic department of economics. Dr. Ahmed Al Nagar, the pioneer of the first

Islamic Bank in Egypt in 1963, was responsible for this department. He also started to establish a similar model in Sudan, later called the

Sudanese Saving Bank, with the same idea of the one which was closed by the Egyptian government.

According to book of English Series (5)of faisal Islamic Bank of Sudan ((In February 1976 H,R,H. Prince Mohamed Al Faisal Al Saoud

held discussion with President

In 1977, Prince Mohamed Al Faisal Aal Saud called the Sudan government to open an Islamic bank in Sudan. The executive and

legislative authorities in Sudan, at all levels, strongly encouraged the idea. In August 1977, Faisal Islamic Bank (F.I.B.) was registered as a

limited public company under the Sudanese Company Act of 1925. The bank was granted tax and custom exemptions. The Bank received a rush of shareholders, and issued shares that increased the share capital of the

bank from 6 million Sudanese pounds to 10 million Sudanese pounds within the subscription period. This warm public reception paved the

way for unprecedented success of the bank. The bank has proved that the Islamic banking format can provide all banking services at a very high

level of skill and competence. This rush for the services of F.I.B. pushed the bank administration to speed up expansion of the bank services

horizontally as well as vertically. The bank opened a lot of branches in different locations in Sudan. At the same time, the bank established

several affiliated companies for trade and services. That included the Islamic Insurance Company (the first Islamic insurance company in the world), the Real Estate Company, and the Islamic Exchange Company. That was in addition to the department of Zakah. (This department was

the origin of the idea behind establishing the Camper of Zakah in the country).

F.I.B made a great effort to obtain Halal (permissible) profit, abiding by the Shariah rules which were applied under the supervision of Shariah Supervisory Board. This Board is composed of well-known scholars who are wholly responsible for ensuring that the bank’s operations are free of

any elements which are contrary to Shariah. The Shariah Supervisory Board (S.S.B.) reviews the bank’s operations to make sure that they are in

conformity with Shariah rules and to rid them of any element of Riba. The S.S.B. also participates with authorities of the bank in drawing up standard contracts and agreements to cover all types of operations and

transactions carried out by the bank. The S.S.B. also reviews the contracts actually signed with the bank’s clients. The S.S.B. may also

give an opinion on future operations to be carried out by the bank to ensure strict adherence to shariah.The board also trained workers by

organizing many training programs.

According to the statement by the chairman of the board of directors in addressing the 31st meeting of the general assembly of shareholders held on march 2010, His Highness Prince Mohamed Al-Faisal Aal Saud, the

process ensured the development of the bank and fulfillment of the requirements of the Central Bank-:(

1- The bank Stepped forward towards a leading position amongst the unit of the banking system, and responded to the requirements of the central bank, in order to cope with international banking changes and developments, and carrying out the prescribed reform and restructuring program. Accordingly, the following requirements have been complied with: Capital adequacy ratio reached 14.2% on Dec. 2009,which surpassed the standard adequacy ratio of 8%. This is a positive indicator of the bank’s financial position.

2- In response to the requirements of the Central Bank of Sudan, the bank fulfilled the restructuring program by increasing its capital to 110 Million Pound by 31/12/2009.

3- In compliance with the requirements of Central Bank of Sudan, and coping with international development in the sphere of Risk Management, the bank established a Risk Management Department and took appropriate measures to ensure propagation to the best practices .

4- Further, the bank continued to intensify external relations with foreign banks and financial institutions.

5- The bank utilized modern technological devices extended to customer in all sectors, strictly adhering to high professional standards and using highly advanced information technology.

6- The bank also participated to relief to the poor, disabled, and sick people and other categories of needy people in the society, through a program of special solidarity and humanitarian donations.

7- Financial support extended by the bank covered health services as well as a wide range of social and cultural institutions, including universities, educational projects, mosques, Quran schools, and sport clubs.

The success of this experiment resulted in establishing other Islamic banks in Sudan, including :

- Tadamon Islamic Bank ------------------1981

- The Sudanese Islamic Bank -------------1982

- The Western Sudan Islamic Bank ------1983

- The North Islamic Bank ------------------1983

- Al-Barka Bank -----------------------------1984

- Co-operative Development Bank .-------1984

These new Islamic banks add a new culture of banking and finance in Sudan. They deal with new modes of investment, such as Mudarba,

Musharka, … etc .

The success of F.I.B. and other new banks aroused the interest of other competing local riba–oriented banks, to study and evaluate this

experience closely.

The movement of Islamic banking in Sudan progressed faster, and the government ordered the three specialized banks (Real Estate Bank,

Agricultural Bank, and the Industrial Bank) to adopt Islamic Windows. The Islamic banking in the Sudan has drawn a very large number of shareholders from the Arab World. Some of these shareholders were

behind the establishment of Islamic Banks throughout the Muslim World (Kuwait, Turkey, Bangladesh, Pakistan, Bahrain, … etc)

The example of the pioneering Sudanese experience gave immense encouragement to others in the Muslim World to establish their own

banks. Delegates from Malaysia, West Africa, Turkey and other countries were sent between 1979 and 1983 to study the Sudanese

experience of Faisal Islamic bank and other Islamic banks in Sudan, with a view of applying these new models .

IN September 1983, the government issued a Judicial Act to change all the country laws and insure their compliance with Islamic Shariah. At the

same time, the Code of Civil Procedures and Civil Transaction Act (1983) was passed.

Then the Central Bank of Sudan directed all the banks of the country to immediately start operating the Islamic banking system. This circular

included-:

1- Immediately shift to use Islamic modes of finance. 2- Immediate prohibition of the interest rate, starting from the date of

issue of the circular. 3- Immediate change of the credit facilities granted under the rate of

interest system to appropriate Islamic modes of finance after obtaining the consent of the customer or liquidate of those facilities if no agreement was reached with the customer.

4- As regards to dealing with foreign (external) entities, the normal rate of interest system was allowed to continue until a new agreement is reached with correspondents. This was (Fatwa) interpretation based upon the Shariah principles ((Necessity Allows Prohibited Acts )). In this period where the decision for Islamization was in hurry, the staff of the different areas of economic and banking institutions were not ready, and where the transitional change needed a lot of time, the replacement of Islamic law immediately and without intensive study and training programs, a lot of weaknesses in the application were inevitable. However, later those problems were solved occasionally by the pass of time.

The Recent Stage (1989-2010) :

Full conversion of the banking system in the whole of the country to Islamic System

This is the most prominent stage in implementing the Islamic banking system in Sudan. The new banking law was passed, obliging the Central

Bank to operate according to Shariah. The C.B. of Sudan issued a directive circular to all the commercial banks in the country announcing

the stopping of all domestic interest-bearing transactions between individuals, public or privet entities, resident or not residents .

At this stage the government issued two important procedures-:

1- Legslative structure of the Islamic banking system.a- Establishing the High Shariah board for the banking system

and Financial Institutions.b- Revision of all laws pertaining to banking through Islamic

model.

A number of committees were formed to -:

1- Revise the country laws pertaining to banking, particularly the Bank of Sudan Act (1959).

2- The Sale of Mortgage Property Act (1990).3- The Banking Businesses Regulation Act (1991).

Financial Institutions that support the Islamic Banking System:

a- Khartoum Stock Exchange (1995):With objectives as –:

i- Increasing saving awareness among the public .ii- Ensuring efficient distribution of financial resources amongst

the different investment opportunities that have positive economic returns .

iii- Introducing Islamic financial tools and instruments for medium and long term investment .

iv- Enhancing the role of the Islamic Banking System through the application of those tools and instruments according to the

Islamic financial Principles.b- Bank Deposits Security Fund (1996)

The bank Deposits Security Fund acts to provide insurance to the bank deposits and to compensate for losses through Takaful

(mutual support ) between the Monterey authorities, banks and depositors. This was to be realized through the takaful fund for

securing saving and current deposits, the Takaful Fund for Securing Investment Deposits and the Takaful Fund for Compensation in cases of complete defaults by clients.

c- Sudan Financial Services Company (1998):This company aims to achieve the following objectives-:

i- Managing shares that are wholly or partially owned by the bank of Sudan and the Ministry of Finance, and lodged with the banks corporation, financial institutions, and companies.

ii- Assisting the bank of Sudan in managing liquidity to achieve the objective of the Monterey policy .

iii-Organizing auctions for sale of Central Bank Musharka Certificates (CMCs) and the Government Musharka Certificates

(GMCs), which are Shariah compliant tools for managing banks liquidity and financing budget deficits.

At the end of 1998 the Bank of Sudan issued the Comperhensive Banking policy (1999-2002) that contained six major areas of

emphasis, including-:a- Credit policy. b- Banking supervision. c- Foreign exchange.d- Banking technology. e- Islamic banking issues which aimed at greater activation of

Islamization of the banking business.

The comprehensive Banking Policy concentrate on-:1-Continuing the process of Islamization and application of all

modes of finance, except absolute mudarba.2 -Working forcefully to approximate the perfect model of the

Islamic Bank.3 -Couninuing application of the accounting and auditing

standard of the accounting and auditing Organization of Islamic Financial Institutions (AAOIFI) .

4 -Issuing a manual for the application and use of the Islamic modes of finance and instructing the banks to strictly adhere

to the manual when granting finance.5-Contuing improvement of Islamic financial instruments and

liquidity management tools.6-Starting execution of the recommendations of the

Conference of Islamization of the Economic Sector (1998) that were mainly related to the banking sector.

7 -Documenting the experience of the banking sector in Sudan, in collaboration with different concerned parties.

8-Activating the role of internal auditing to be able to validate the compatibility of the activities of banks and other

financial institutions to Shariah in collaboration with the Shariah Board in each bank .

The Main Islamic Modes of investment

The Sudanese banking system applied these modes of investment :

1- Murabha ( Mark-up): Selling at cost with addition of known profit. The owner of

the commodity sells it to the buyer at the capital price and ads a profit agreed upon by them. The bank practices selling by

profit to the buyer. When the client asks the bank to buy a commodity from the local market or import it from abroad, the

client describes the commodity and give complete specification. Then the bank purchases the commodity, sets

the price, and acquires it. Then the bank supplies it to the applicant at its cost plus a known profit .

The bank performs the selling through profit as follows-:i-The client requests the bank to buy a known and defined

commodity.ii-The client promises to buy the commodity at its cost plus a

set profit.iii-After signing the preliminary agreement, the bank buys the

commodity according to the required specifications.iv-After acquiring the commodity, the bank presents it to the

client.v-If the applicant accepts it, they conclude a selling-by-profit

agreement. But if he refuses, the commodity remains the ownership of the bank .

))There is existence of some misapplication of Murabha which turned out to rather fictitious in some

cases due to the difficulty of tracing its implementation .((

2- Partnership ( Musharka):This is a partnership contract whereby the bank and the client

contribute jointly to finance a venture. Musharka has three forms -:

a- Continued musharkac- Diminishing musharka

c-Musharka in the working capital

The formula of implementation of the partnership at the bank-:

1-The client desirous of the partnership submit an application to the investment section at the branch including his name,

address, location of his business, the name of the party recommending him, the kind of partnership and its subject,

the volume of the partnership, the quantity of his contribution, the period of time at the end of which the

partnership will be settled, and his experience in the specific sphere.

2-The client provides a feasibility study of the business showing its economic, technical and social

feasibility. If the feasibility study gives proof in favor of the business, then they

recommended its ratification.When the approval is obtained, the bank agrees with the client on conditions,

leading the drafting of the partnership contract for the specific business. The

agreement includes the opening of a current account for the business, the manner of storing goods, statement of the

partnership administer, the method of marketing the goods, the period of time agreed upon for

settlement, the manner of settlement and distribution of profits. The contract stipulates

that the loss is shared by two parties, each at the rate of his contribution.

3-The business partnership is executed after approval by a specialized official according to the conditions of approval

and the basic regulations of offering the finance, and the circular regarding it.

4-After completing the execution and opening a file that contains all the basic documents, the

specialized official follows up the progress of the partnership periodically and writes reports.

5-The settlement is concluded by selling the goods or by settling the partnership and every partner receives his share .If

the partner wishs to buy the Bank share, he shall have apriority.

6- There is another kind of partnership in which the bank and the partner agree that the bank will sell his share to the

partner in the partnership by installments. This is applied in the field of production and services schemes and is known

as the decreasing partnership.

Advantage of Musharka:1- Efficient allocation of resources.2- It focuses on an economic and social viability.3- Engagement in productive activity.4- Co-management in productive activity.5- Non-financial capital.6- Absence of debt.7- It not build up on debtor/creditor relationship.8- Long –term perspective.9- High profitability.

3- Mudarba: It is a trustee contract whereby the bank provides capital and

the client provides labor for joint venture. The profit generated by the venture is divided according to a predetermined ratio. In the Mudaraba contract is one basic juristic rule governing the

transaction, which is that losses are to be borne only by the provider of funds (lender), i.e the bank. The user of funds, i.e.

the customer (the borrower) does not bear any portion of the loss unless the loss was due to misconduct or negligence on

his/her part.

4- Salam Sale: This is sale in which the price is paid immediately for goods

to be delivered at a future date. The rational for Salam is the need of producers of agriculture and small-scale enterprises as

for these conditions-: i-The price of goods to be delivered later must be received by

the seller at a time of signing contract. ii-Delivery of the goods sold must be postponed for a definite

fixed time.iii-The goods delivered must be of a type that is commonly

available at a later time fixed delivery.iv- The good to be delivered is specific and can be defined

physically and quantitatively, such as kilograms of wheat, etc. .Price of Salam can be in installments, that each period has a

different price, like –for planting –for clearing –for harvesting. These three steps can help the farmer to get finance at the

specific times he need. Also fugha accept the payment of the principal to be made in kind.

The result of Salam Finance :a- It increases the % of repayment to the bank. b- Solves the problem of informal finance.c- Increases the production pattern.d- Reduces the rate of inflation.e- Changes the situation of the agricultural corporation.f- The loan can go directly to production not like other

modes. g- Increases the study and research on Salam.

Investment (time) Deposits: One of the major differences between an Islamic bank

and a conventional bank is that the former mobilizes funds

on profit and loss sharing basis, while there is no similar concept on the sources (liabilities ) side in conventional

commercial banking, on the uses (assets)side, the portfolio of Islamic Banks is composed of various finance are

based on profit-loss sharing principle such as Musharka &Mudaraba.Thus, unlike the situation in conventional

banking, the customer –banker relationship in Islamic Banks is not mere debtor/creditor relationship so the whole

traditional banking system depends on this principle (Debit /Credit) only , the system of finance made the

relation bank and the client only on that basis so these banks use a money as commodity they sell these amount of money with the interest ,the price of money is buled upon

this idea only. On the liability (sources ) side for traditional

banks ,deposit funds mobilized on sight and time deposit basis constitute an ultimate liability ,as principle of these funds as well as their fixed (pre-determined) interest rates

are contractually guaranteed. Islamic Banks on the other hand arrange deposit

mobilization on a profite and loss sharing (PLS)basis . Hence ,a depositor is not a net creditor to the bank ,these

funds (deposits) which are referred to as profit sharing investment accounts are reported in the balance sheet .

The investment account at Islamic Bank buied on the basis of Mudarah mode those who open the investment account

be as ( money owner ) and the bank is the second part (Mudarib) the Islamic bank b uses these funds of money according to Islamic principle at a profitable projects and

share the profit gain with the owner of these accounts , this type of relation between the bank and the public is quite

different for conventional banking system – this sort of relation the government use by the government when add

an alternative for treasurey bill that based on the rate of interest but on the Islamic Shareah based on Mudaraba

model (Capital –Iabour) .

5- Istisna (having something made) =Manufacturing or construction=

It is a contract to sell a described items in custody, which requires it to be manufactured in a special way it include

specification of the type ,kind, quality, quantity of the subject matter to be produce must be known and the price and the

delivery date must be known 8-The lease

Banking Services :

The Islamic bank deal with general banking services that include-:

1- Current account –2- a current account is one where the client deposits an

amount of money at the bank. He shall have the right to withdraw from it by means of cheques or payment orders or any similar instruments . C.A. is adapted in as a defective deposit. It is a loan contract. Also it is a service account that the bank sets aside a number of specialized employees who open the account, receive the deposits, either cash or by document. They follow the movement of the account and supply a periodical statement of the account on demand etc. Whenever deposits and withdrawals are considered, it is not permitted to receive or grant stipulated interest on the operation, because any loan that entails stipulated benefit is Usury. In C.A., it is permitted to take remuneration on the services, but also the bank may extend the service free.

3- Saving Accounts Deposits :=They follow the example of current accounts and are

governed by virtue of the loan or deposit contract, because the client depositing of money in the saving

account and his permission for the bank to deposit it, the bank guarantees it on demand. It becomes a deposit at

the beginning and a loan at the end .4- Investment Deposits Accounts :=

These represent the deposits lodged at the bank for the purpose of investment. The client delegates the bank to

employ it in the investment operations chosen by the client or allows the bank to utilize it in the framework of

the directive policies, provided that the profit is distributed according to the conditions agreed upon .The general conditions for Investment Deposits are=:

i-Usually an agreement is reached on the basis of unrestricted investment deposits.

ii-The bank allows the withdrawal or addition to the deposit, receiving his right of the returns at the end of

the period.iii-The investment deposit is calculated by counting the

daily number of the deposits participating in profits. iv-Profit or loss is subject to the conditions of

investment contact.v-The work is done currently to distribute the profits

every 3 months.vi- No loan or advances to be granted on the guarantee

of the profits .

Consortium of the commercial Bank:

This is a new model to finance agricultural corporations and change the past system that depended on the interest rate declared from Sudan

bank. This new consortium use Salam and other modes of Islamic finance. The Bank of Sudan in 1991 established a specialized

Consortium Fund for Agriculture Finance to which all the Banks were obliged to subscribe . The purpose of establishing that Consortium fund

was to overcome the many problems associated with the finance for Agriculture. In addition, the objective of this tool was to give finance on

commercial basis away from unduly utilized subsidy, and reduce the budgetary burden resulting from inefficient government finance to

agricultur. The performance showed considerable success in its earlier years.

Macro level Instruments

New Instrument For Monetary policy

The Bank of Sudan introduced new instruments of direct Monterey management as a substitute policy for the rate of interest. These new

instruments include-:

A-Central Bank Musharkah Certificate (CMC)

B-Government Musharka Certificate (GMC)

C-Government Investment Certificate (SARAH).

instead of the Treasury bills and Central bank Bonds, as follows -:

1 -Profit Margin and Musharkah Shares.

2 -Statuary (legal)Reserve Ratio .

3-Central Bank Musharkah –Certificate (CMCs).

The Bank of Sudan introduces these Certificates in June 1998, issued by Sudan Financial Services Company (SFSC) on behave of the Bank of

Sudan and the Government of Sudan. Essentially they represent a limited number of shares in a special fund composed of the pool of government

investment in nine commercial banks. The CMCs allow its owner to share with the bank of Sudan and the Ministry of Finance the benefit of

investing in banks wholly or partially owned by them. The High Shariah Supervisory Board (HSSB) approved these certificates for the banking system and other financial institutions as the first Islamic interest–free

instrument used to mange liquidity and conduct open market operations.

The utilization of CMC to conduct open market operations is considered to be more effective in influencing liquidity when compared

with the statutory reserve ratio. If the bank of Sudan wishes to reduce liquidity of commercial banks, then it would sell certificates with the

amount of money it wants to withdraw from the banks. The opposite would take place if it wishes to pump liquidity into the national economy. Also the banks could sell their CMCs to the bank of Sudan when they are

in need of more liquidity.

4-Government Musharkah Certificates (GMCs)

The Government Musharkah Certificates are also equity–based financial securities that were introduced in 1999 as an Islamic-oriented

means for financing the budget deficit. They offer the bank of Sudan an additional effective tool for liquidity management.These Certificates

allow their owner to share the profit or loss\es resulting from the operations. The companies and corporations of all these certificates

achieve the following objectives=:

a-Managing liquidity on the macro-economic level through open market operation (OMO).

b-Covering part of the budget deficit instead of printing more paper money by the bank of Sudan.

c-Accumulating national saving and encouraging investment through increasing awareness among the general public with the benefits

associated with this investment.

)access for trading in GMCs is open to many parties such as Banks, Financial Institutions, Privet and Public sector companies, and

individuals.

The Takaful (Islamic Insurance):

The first Islamic Insurance Company in the world started in Sudan in1979. It belongs to Faisal Islamic Bank. It is based on cooperative

insurance. The second is Albaraka Insurance Company. The Islamic company deal with all types of insurance, except life insurance which is

a replacement to the model of Takaful group. All these companies are registered under the control and supervision of Muslim holder and they operate according to Shariah laws. All these companies should perform

their activities in accordance with the Islamic Insurance system. Every Company that performs the Takaful should establish a Takaful Fund

(TF) to contain the reserve. The company keeps these types of account=:

1-Shareholders account.

2-Policy holder account.

3-Islamic Mudaraba

The Takaful which have been schemes implemented in the field of insurance in Sudan are=:

1- Group Takaful insurance.2- Group Takaful in case of accident. 3- Group Takaful in case of travel .4- Group Takaful in regarding medical and health problems.5- Family protection Takaful .6- Mortgage protection Takaful.7- Free education Takaful .8- Sport Takaful.9- Takaful through saving and investment.

The Shariah Supervisory Board:It covers the following aspects=:

1-The board reviews the company policy wording and forms to make sure that they coincide with the shariah regulations.

2 -It reviews the insurance treaties to make sure that they match with Shariah Law.

3-The design and revision of the investment contracts at the application of investment activates.

4-Answering all the questions raised by the officials of the said company.

6- Assures that all companies apply all the regulations concerning Islamic insurance.

7- Checking the company activities to ensure their conformity with Islamic Laws.

8- The head of (SSB) attend the general assembly meeting and expresses the opinion of the Board.

The S.S.B answer questions about Islamic Insurance and said ((Muslim scholars are consensus that cooperation insurance is

legitimate and permissible)) .

New Sukuk ModelThe Ministry of Finance established a new department for Sukuk organization that a lot of these number of sukuk are

available for investment like=: 1- Salam sukuk.2- Leasing Sukuk.3- ijarah Sukuk.