This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The World Bank does not guarantee the accuracy of the data included in this work. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The material in this publication is copyrighted. Public Disclosure Authorized FINANCIAL SECTOR ASSESSMENT PROGRAM Public Disclosure Authorized SUDAN TECHNICAL NOTES MAY 2005 Public Disclosure Authorized Public Disclosure Authorized INTERNATIONAL MONETARY FUND THE WORLD BANK MONETARY AND FINANCIAL SYSTEMS DEPARTMENT FINANCIAL SECTOR VICE PRESIDENCY AFRICA REGION VICE PRESIDENCY Contents Glossary .....................................................................................................................................4 I. Prudential Regulation and Supervision ..................................................................................6 II. Stress Testing ......................................................................................................................10 A. Introduction .............................................................................................................10 B. Identification of Risk Factors ..................................................................................11 C. Stress Test Scenarios and Results ...........................................................................14 D. Future Capital Needs ...............................................................................................20 E. Conclusions .............................................................................................................24 III. Efficiency of Sudanese Banks ...........................................................................................26 A. Introduction .............................................................................................................26 B. Estimation of Efficiency ..........................................................................................26 C. Estimation Results ...................................................................................................27 D. Effects of Bank Characteristics on Efficiency ........................................................30 E. Profitability Versus Efficiency ................................................................................31 IV. The Insurance Sector in Sudan ..........................................................................................34 A. Market Development...............................................................................................34 B. The Regulatory Framework ....................................................................................40 .V Assessment of the Sudanese Payments System .................................................................46 A. Introduction .............................................................................................................46 B. Information and Methodology Used for Assessment ..............................................46 C. Institutional and Market Structure—Overview .......................................................46 D. Payment Systems Infrastructure..............................................................................47 E. Reforms Under Way ................................................................................................52 F. Recommended Actions ............................................................................................57 VI. Legal Framework ...............................................................................................................64 A. Introduction .............................................................................................................64 B. Financial Sector Legislation ....................................................................................65 C. Commercial Law Framework..................................................................................68 D. Corporate Governance ............................................................................................69 E. Accounting and Auditing ........................................................................................70 F. Company Registration .............................................................................................70 G. Bankruptcy and Creditor Rights .............................................................................71 H. The Court System....................................................................................................72 I. The Peace Accord .....................................................................................................74 J. Recommendations ....................................................................................................75 - 3 - Tables 1. Financial Soundness Indicators for the Banking Sector, 1999–2003 ..................................15 2. Stress Test Scenarios............................................................................................................17 3. Growth Stress Test Scenarios ..............................................................................................23 4. Sensitivity of Relative Efficiency Ranking ..........................................................................29 5. Regression Results ...............................................................................................................31 6. Indicators of Bank Efficiency and Profitability ...................................................................32 7. Comparison of Insurance Markets in Africa ........................................................................34 8. Insurance Sector Growth......................................................................................................35 9. Market Shares of the Largest Insurance Companies, 2003 ..................................................36 10. Insurance Company Investments .......................................................................................40 11. Premium Income and Claims .............................................................................................40 12. Detailed Assessment of Observance of CPSS Core Principles for SIPS and ....................54 Figure 1. Distribution of Efficiency in the Benchmark Case ..............................................................28 Box 1. Sharia-Compliant Insurance .................................................................................................38 Appendices I. Stochastic Production Frontier Approach: An Example ......................................................33 II. IAIS Principles ....................................................................................................................43 III. Statistical Information on the Payment System .................................................................61 IV. Extract from the Comprehensive Peace Agreement ..........................................................76 V. Issues in the Introduction of a Dual Banking System .........................................................78 - 4 - GLOSSARY Acronyms AAOIFI Accounting and Auditing Organization for Islamic Institutions AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism BOS Bank Of Sudan CAR Capital Adequacy Ratio CDD Customer Due Diligence CPA Comprehensive Peace Agreement DIF Deposit Insurance Fund FATF Financial Action Task Force FIU Financial Intelligence Unit FSAP Financial Sector Assessment Program FSSA Financial Sector Stability Assessment GIC Government Investment Certificate GMC Government Musharaka Certificate ISA Insurance Supervisory Authority KSE Khartoum Stock Exchange MFE Ministry of Finance and National Economy MFI Micro-Finance Institution MLCA Money Laundering (Combating) Act NPL Non-Performing Loans/Investments NPO Non-Profit Organization ROA Return On Assets ROE Return On Equity ROSC Report on Observance of Standards and Codes RTGS Real Time Gross Settlement System SD Sudanese dinar SME Small and Medium-sized Enterprises STR Suspicion Transaction Report TPL Third Party Liability Islamic Financial Terms Al-Wadiah Safekeeping arrangement of funds with no interest payment Government Investment Securities based on securitized leasing and project financing Certificate (GIC) Government Musharaka Securities based on units in a mutual fund of publicly-owned Certificate (GMC) companies Ijara Leasing contract Istisna’a Financing of work in progress, whereby financer receives goods when manufactured Mudaraba Instrument, in which one party contributes capital, the other labor/expertise - 5 - Murabaha Instrument, in which financer purchases good with agreement on resale at a price based on initial cost plus a mark-up Musharaka Instrument, in which parties contribute equity and share profits and losses Riba Interest Salam Instrument, in which buyer pays price before receiving goods Takaful Islamic insurance; operates similar to a mutual benefit company - 6 - 1 I. PRUDENTIAL REGULATION AND SUPERVISION Introduction 1. The banking sector is the backbone of the Sudan’s financial system and will continue to play an important role as financial intermediary and primary source of financing for the domestic economy. As of December 31, 2003, there were 26 commercial and specialized banking institutions in Sudan which comprised