In the last few years, leading Lebanese banks – Byblos Bank, Fransabank, Bank of Beirut and Audi Saradar – have set up shop in Khartoum. The expansion of Lebanese banks in Sudan was built on personal relations linking Lebanese bankers to the Lebanese community in Sudan and later with the Sudanese financial community. “It’s a relationship that can be traced back to the 70s,” said Laurent Hawath, head of the international banking division at Byblos Bank.
In a world where globalization has become a way of life, the move was also part of a broader development strategy. “The Lebanese banking sector boasts a total balance sheet amounting to 3.5 times the Lebanese GDP. In such a saturated market, Lebanese banks are simply bound to expand abroad. In our case, it materialized through Fransabank Aljazaer in Algeria as well as Sudan and Syria, where we are scheduled to open in 2008,” said Mansour Bteish, Fransabank’s general manager. According to Fouad Chaker, assistant general manager at Bank of Beirut (BOB), “Expansion in Sudan is mainly driven by lucrative business opportunities as well as regional expansion concerns.”
Besides historical commercial ties linking Lebanon to the country, Lebanese banks are also attracted by its size and enormous resources. Sudan occupies over 2.5 million square miles and is home to around 36 million people. Ravaged by a 23-year-old conflict that has pitted the Muslim north against the Christian south, the country ended its civil war in 2005, with the signing of the Comprehensive Peace Agreement (CPA). Since then, the economy appears to be on the fast track, driven by the need to rebuild a tattered infrastructure. “The country looks like Saudi Arabia did 50 years ago,” says Georges Andraos, deputy head of the international department at Fransabank.
Huge potential
Sudan encompasses vast areas of cultivatable land, has gold and oil reserves and huge untapped minerals. “Other core export materials are Arabic gum, sesame seeds and live stock,” said Dr Imad Itani, general manager at Bank Audi and chairman of Al Ahli Bank, its National Bank subsidiary.
According to Nassib Ghobril, head of Byblos bank’s economic research department, “The large expat community living in the Gulf accounts for massive yearly remittances, while the burgeoning oil industry in 2006, produced around 492,000 barrels per day – up from 312,000 barrels in 2005 and appears to be steering the economy.”
The surge in revenue stemming from the oil bonanza has translated in an average 8% growth as well as inflated foreign reserves increasing by 45% in 2006, from 40% in 2005, reaching around $5 billion. In 2007, they were equivalent to 4.3 months of import cover, a key indicator. “Growing foreign reserves have given the Central Bank the possibility to support the local currency, which has steadily strengthened in the past few years, picking up from 255 to 210 Dinars against the dollar,” said Ghobril.
With sound macroeconomic policies underway and public companies restructuring and privatizing – such as the Worker’s Bank and the Agricultural Bank – the Sudanese banking sector is opening up. Sudan underwent an IMF reform program that came into effect in 1997, introducing a number of strengthening measures, such as tightening capital adequacy ratios and classification and provisioning against bad loans, establishing new capital minimum requirements, relaxation of strict credit allocation rules, and rising internal liquidity ratios.
“The Central Bank is also encouraging mergers and foreign capital investment,” said Chaker. With Sudan ranking 11th out of the 17 Arab countries on the IMF banking sector developing index, there is definite room for improvement. “Another good indicator to market potential is the level of loan portfolio to GDP, which is around 15% compared to 80% in Lebanon,” said Hawath. The sector has recently witnessed rapid growth, as the reconstruction effort progresses and production from Sudan’s oil fields steps up. According to Nassib Ghobril, banks assets increased in 2005 by 47% to the equivalent of $6.63 billion.
Common language and culture is another important factor for Lebanese banks. Byblos was the first to step into the Sudanese market in 2003, with Byblos Bank Africa Ltd. It owns 65% of Byblos Bank Africa’s $25 million capital, in partnership with the Organization of Petroleum Exporting Countries (OPEC) and the Islamic Corporation for Development, which own 20% and 10%, respectively; the remaining 5% belongs to a local Sudanese businessman. The bank offers tailor-made products to Sudanese corporations and private clients and features a wide range of services, such as commercial, correspondent and private banking as well as investment products. “We have one head office for now and are planning three more branches in the coming few years,” pointed out Hawath.
Fransabank owns 20% of Sudan’s Capital Bank in partnership with Kuwaiti and Egyptian financial institutions. The bank boasts a paid-up capital of $55 million and focuses mainly on wholesale banking, financing major projects and investment funds as well as capital markets, share placement, deposits and investor services and targeting real estate, infrastructure, services, industries and the agriculture sector. “We’re focusing on wholesale and corporate finance. We’re not expecting to open any branches in the near future,” said Bteish.
Bank of Beirut (BoB) recently acquired 17.76% of the Sudanese French Bank’s $40 million capital, the second largest privately-owned bank in Sudan and the third largest among public and private banks. As for Bank Audi, it purchased 75% of the National Bank of Sudan in September 2006.
The National Bank of Sudan owns 17 branches in Khartoum and in other areas – except in the south and Darfur – with five branches set to open in the next few years as Audi National bank. Run by a Lebanese general manager, the bank is backed by 12 permanent Lebanese staff members and supported by 280 employees. “We will offer traditional retail, commercial and corporate banking. We are currently geared toward the industry sector, shying away from the agriculture, which requires a more specialized approach. Trade financing is also another area we intend to capitalize on,” said Itani.
Burgeoning opportunities
In a country where retail banking remains in its nascent stage, several banks seem to be directing their attention on wholesale and corporate activities. However, advances of commercial banks by sector show that agriculture accounts for 7%, industry 15%, exports 6%, imports 3%, local trade 32% and others 37%.
“In 2006, growth in credit expansion, in the form of advances to the private sector increased by 79% and stock of domestic advances increased by 60%, the latter being a good liquidity indicator. Of course we have translated these indicators in conventional banking layman terms, as we cannot really talk in Sudan about credit or interest, because of the Islamic system,” said Ghobril.
The Sudanese banking sector is Islamic, except for the southern area, where conventional banking is common practice. “The dual system between the north and south is challenging and could result in some policy incoherence,” underlined Ghobril.
Under the CPA, the Sudanese banking sector follows sharia law, and is placed under the jurisdiction of the Central Bank. “In the south, however, the sector is monitored by the local Central Bank,” said Itani. “There is a big debate about implementing a dual system, but I don’t think it will ever be finalized. Operating under sharia law, however, provides us with an excellent opportunity to expand into other lines, such as Islamic banking, which has witnessed dramatic growth recently,” said Itani.
Bank of Sudan has continued to play its role as the bank for the central and regional governments, and for government and governmental institutions, contributing to their capital formation and keeping their accounts in both local and foreign currencies.
According to several institutions, the central bank has often tried to direct investment efforts toward specific sectors, such as craftsmanship and agriculture.
Underlying the Sudanese banking sector is the political risk that is dovetailing the country’s economic progress. Although the CPA has created great opportunities and given hope to potential investors, the Darfur problem still puts a heavy toll on the economy. “Political instability is limiting growth and liquidity and creating an non-conducive environment,” said Hawath, who sees volatility as another by-product of the emerging market. For most banks, political risk, legal risk and operating under an Islamic system are inherent to Sudan’s market risk.
“Another main issue was the staffing and human resource aspect, a matter of importance in an operation comprising 57 employees. After all, banks are built on reputation, people and systems,” added Hawat. For Itani, the high correlation between oil prices and Sudan’s potential growth is another risk factor, in addition to corrective reforms the political system is willing to undertake in an effort to ward off corruption. Last but not least is the non-performing loan (NPL) ratio, which has fallen from 9% in 2004 to 6.9% in 2005. As the rise of commercial banks into the sector increased, the ratio of actual loan provisions to bad loans increased to 32% in 2005, from 26% in 2004. “From an international standard perspective, NPLs are still quite high,” underlined Ghobril
Regardless of positive prospects in Sudan, the Darfur question and its possible negative consequences on the country’s fragile economy remains of essential importance. The country is at risk of falling victim to sanctions as well as from concerted efforts of activist organizations, such as Save Darfur and others. Recently, Fidelity Investments and Berkshire Hathaway, which both own shares in Chinese oil companies operating in Sudan have been under attack from activist groups. “We do not know anything yet about the nature of the sanctions regarding the Darfur issue or when they will ever be implemented,” said Ghobril.
Meanwhile, the race seems well underway in the Sudanese banking sector. Lebanese banks are not alone in seeking to carve out a bigger piece of the cake, with Arab Gulf banks spending their oil revenue surpluses in Sudan. According to Andraos, Kuwait alone has invested around $6 billion in the African country. “Sudan is also witnessing an assault of emirate banks, which are entering the market en force,” said Chaker.
Within the MENA region, Sudan offers promising business opportunities, though tainted by political risk. “Management of the peace process has given us hope on how the Sudanese government will go about the Darfur question. Based on the type of investment we’ve made, our management approach and our balanced expansion strategy, we expect to reap the benefits presented by the market,” concluded Itani.
