Home | Comment & Analysis    Monday 2 July 2007

Islamic and traditional banking in southern Sudan

By Professor Ali Abdalla Ali*

June 30, 2007 — It came in the news (ST.20th.June 2007) that the South Sudan Cabinet rejected to authorize Islamic banking system to operate in the South saying it will breach the Comprehensive Peace Agreement (CPA).

This is true since it was made very clear in the CPA that since the South will adopt a traditional system (capitalist) then it will also adopt a traditional banking system and the North having adopted an Islamic system it will have its own Islamic banks. The question is: is it the banks and their nature that comes first or the economic philosophy that guides an economy? One feels that there has been a gross misconception about what should come first. This is due to the manner and the way through which the Islamic banks were first introduced and established in Sudan.

Usually banks are instrument of policy in any economy. If the economic system is capitalist in nature banks are usually privately and also publicly owned. If the system as used to be in the Soviet Union (central planning) then banks and other financial institutions are owned by the State, the State cannot venture to leave huge financial resources outside the purview of the planning agency , since it might jeopardize the smooth execution of the plans. From this follows the fact that financial institutions are created as instruments of the major philosophy that guides the economy. They live and die in accordance with the existence of the main philosophy and policy. That is why when the nationalization of foreign banks and foreign companies as well as some national private companies (e.g. Osman Salih & Sons) took place in Sudan in May 1970, the memo that led to the nationalization indicated that since the government intended to adopt socialist planning, it would not have been logical to leave financial institutions and foreign companies in private hands. In fact for the first time is Sudan’s recent history an overall Credit Plan was prepared by a Soviet economist called Stepanov which even took care of the small funds (Sanduq) that are usually contributed to in different lanes of urban Sudan.

When the National Islamic Front (NIF) made reconciliation with ex-President Nimeiri in mid seventies, the idea of establishing an Islamic bank was entertained and was thought feasible. It was Prince Mohamed Al Faisal finding it rather difficult to establish such a bank in Saudi Arabia, resorted to establishing such a bank in Sudan through the assistance of some Islamists. The whole system was traditional and if a license was required from the Bank of Sudan at that time, it would have been rejected by the Bank of Sudan authority. Therefore, the promoters of Faisal Islamic Bank had to go up to the ex-President Nimeiri who at that time was showing a certain degree of inclination towards the Islamists. Therefore, the ex-President Nimeiri gave the permission to start the first Islamic bank in Sudan and possibly in the area .This was followed by many other Islamic banks afterwards .Such other banks got their licenses from the Bank of Sudan .Later on in September 1983 Usury (Riba) was prohibited and Islamic Sharia was adopted. In 1984 the Civil Act 1984 , was passed which prohibited all forms of Riba in the Sudan economy and banks were required to go Islamic. However , the emergence of Islamic banks was a very positive addition to the banking system since they have drawn considerable amounts of funds whose owners were reluctant previously to deposit their saving in what they thought were non-Islamic .The performance of such banks is still to be evaluated.

In this case it is the instruments of policy which were Islamized and the main economy remained un-Islamized until the oncoming of the present government which applied a full Islamic system in Sudan thus deepening the whole process specially in the banking system. In this case the policy instruments preceded the basic philosophy that guided the economy. Therefore, it is the idea that banks and not the philosophy seemed to be the dominant preoccupation of policy makers.

When negotiations in Nevasha took place the government side was adamant on the issue of continuing with the Islamic banks as well as policies both being considered as a very significant achievement of the Islamists. It would not have been compromised. At the same time to South side insisted to have a traditional system of economy which meant that the banking system were to carry on with interest (Riba) .In a seminar later on and after the signing of the CPA which was held in Al Rai Amm paper, the governor of Bank of Sudan indicated that banks in the North will remain Islamic and that no traditional banks operating on the basis of Riba were to be allowed. That is what is usually referred to as the Dual system or Two Windows arrangements. The writer commented and referred to the fact that as long as there is an article in the CPA which insures and guarantees the movement of ’people, capital and goods between the two parts of the country, that Sudanese businessmen who may not be accustomed to the Islamic practices might try to go South. The governor commented saying" let them go and save us troubles!!!". Recently the Central Bank of Sudan authorities requested from the South government Cabinet to allow the branches of Islamic banks operating in the South to adopt the Two Windows arrangement i.e. to transact in Islamic and traditional arrangements, but the government of the South was reluctant to accept the proposal. Either that such banks go fully traditional or for such banks to pack up and go North to their HQs.

Therefore, it is not surprising that the Cabinet of the South refused to allow Islamic banks to operate in the South. Since the North will not allow traditional banks to operate in the North, it is, therefore, only logical that the South government does the same i.e. not to allow Islamic banks to operate in the South. If the Central Bank of Sudan authorities and advisors in Nevasha initially accepted the Two Windows system in the CPA a lot of talk would have been saved. Why this was not done is very difficult to surmise.. It has been, however, very clear right from the start that according to the CPA, there will be two different economic systems and, therefore, two different banking systems, which may not be conducive to unity in the end. In fact there are other issues which might lead to making unity unattractive.

Such one issue is the idea of planning for development which will be the subject of a forthcoming analysis in ST.A certain degree of flexibility by way of adopting the Two Windows arrangement could have solved the problem. To ask the South authorities to allow Islamic banks in the South to function on the basis of the Two Windows arrangement and not to allow such an arrangement in the North is strikingly illogical and unfair. As an economist this is how I see the issue.

(* The writer is Professor of Economics,College of Business Studies, Sudan University of Science and Technology. He can be reached at aliabdalla.abd@gmail.com)