VZCZCXRO3329
OO RUEHROV RUEHTRO
DE RUEHKH #0332/01 0561548
ZNR UUUUU ZZH
O R 251546Z FEB 10
FM AMEMBASSY KHARTOUM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0279
INFO IGAD COLLECTIVE
UN SECURITY COUNCIL COLLECTIVE
RHMFISS/CJTF HOA

UNCLAS SECTION 01 OF 03 KHARTOUM 000332 
 
SENSITIVE 
SIPDIS 
NSC FOR MGAVIN, LETIM 
DEPT PLEASE PASS USAID FOR AFR/SUDAN 
ADDIS ABABA ALSO FOR USAU 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON ENRG SOCI ECPS EIND SU
SUBJECT: SUDAN: EXPERTS ASSESS MANUFACTURING, SERVICES, BANKING 
SECTORS 
 
¶1. (U) Summary:  On February 21, Alwaleed Alatabani, World Bank 
(WB) Senior Financial Sector Specialist told PolEconOffs at a Donor 
Economic Forum meeting that Sudan's high cost of loans and 
over-reliance on collateral-based lending have stifled business 
growth.  In addition, corruption, non-performing loans (NPLs), the 
lack of regulatory measures for the financial system, the absence 
of credit bureaus or of systems for discharge of debt such as 
bankruptcy also hamper the system.  The government's microfinance 
system is not working, in part because of interest rate caps.  Uri 
Mans, a researcher at the Amsterdam Institute of Metropolitan and 
International Development (AIMID) said that tourism, ICT 
(Information and Communication Technologies)/telecommunications, 
transport and logistics are among the types of companies likely to 
expand in the future because of the flow of business travelers to 
Khartoum.  End Summary 
 
 
 
--------------------------------- 
 
Loan Costs Stifle Business Growth 
 
--------------------------------- 
 
 
 
¶2. (U) On February 21, World Bank Economist, Alwaleed Alatabani 
addressed donor country economists and economic officers gathered 
for the monthly Donor Economic Forum.  Alatabani said Sudan's 800 
firms in the manufacturing and services sector face financing 
problems due to the high cost of loans.  Businesses are required to 
put up 125 percent of the value of the loan in collateral to secure 
financing for business operations.  According to Alatabani, the 
cost of finance rates highest among the key concerns of small and 
medium-sized enterprises (SMEs) that want to do business in 
Khartoum.  As collateral-based lending prevails, firms have 
resorted to financing through the private sector; this ultimately 
slows growth in all sectors, he said.  Another deterrent to 
securing loans is the wide gap in lending rates between Government 
borrowing (16-18 percent) and the rates for private enterprises 
(200 percent).  Alatabani reported that the financial sector 
operated below par from 1998-2008.  Non-performing loans (NPLs) 
were the major reason for the financial sector's poor performance. 
Overall, Alatabani concluded, Khartoum must improve its access to 
finance, strengthen its financial institutions by establishing a 
credit bureau, strengthening statistical data collection, offer 
incentives to lenders who are willing to take on risks, and develop 
its infrastructure, because poor transport and bus linkages prevent 
matching supply and demand. 
 
 
 
--------------------- 
 
NPLs Must Be Remedied 
 
--------------------- 
 
 
 
¶3. (U) Non-performing loans (NPLs) constitute another obstacle to a 
fully functional financial system.  Alatabani said the NPLs need a 
"bailout" in order to separate the good banks from the bad and to 
create conditions that would allow recovery or write-offs of loans 
in distress.  The NPLs needed to be reduced through a restructuring 
program to free up Bank capital for new lending.  The GoNU has 
begun a program to remedy the NPL problem, Alatabani added.  He 
said that a part of the strategy is to encourage directed lending 
and to diversify financial products, which would help SMEs get 
around needing collateral to secure loans. 
 
 
 
--------------------------------------------- --- 
 
Regulatory Framework Needed for Financial Sector 
 
--------------------------------------------- --- 
 
 
 
¶4. (U) The lack of legal institutions and systems for redress of 
creditors such as bankruptcy laws are also an impediment to doing 
 
KHARTOUM 00000332  002 OF 003 
 
 
business.  Sudan currently does not have credit information bureaus 
or policies/provisions that give creditors the information they 
need to lend.  Equally importantly, he said, the GoNU needed a 
review of the financial regulatory framework; for example, creation 
of a capital markets authority.  He said Sudan has a unique 
financial structure since it is regulated by the Central Bank of 
Sudan (CBoS) which also sits on the board of the Sudanese Stock 
Exchange.  This creates a conflict of interest for the GoNU and 
therefore, Alatabani suggested, the GoNU must make some 
institutional arrangement to regulate the market.  The GoNU also 
needed to expand on non-bank financial services such as leasing, 
which would limit the requirement for collateral and allow 
companies access to business resources such as tools and supplies, 
he said. 
 
 
 
¶5. (U) Alatabani said that corruption also plays a role in problems 
facing the financial sector, particularly in the valuation of real 
estate which is often assessed at three or four times its fair 
market value. 
 
 
 
----------------------------------------- 
 
GoNU Micro Finance Program Needs Reworking 
 
----------------------------------------- 
 
 
 
¶6. (U) Adding to Sudan's financial sector woes is the GoNU's 
program of strictly regulated microfinance loans (MFI).  (Note: 
microfinance is defined as a means of extending credit, usually in 
the form of small loans with no collateral, to nontraditional 
borrowers such as the poor in rural or undeveloped areas.  End 
Note)  The GoNU directs banks to set aside a portion of their 
earnings for micro finance and requires them to cap interest rates 
at ten percent for these loans.  Alatabani said the World Bank 
estimates that a 24-26 percent rate is required to be profitable. 
The GoNU's policy is therefore seen as retarding development of the 
MFI sector.  The private MFI sector would allow loans at market 
rates without a cap.  According to Alatabani, the GoNU now realizes 
that the program is not working and is considering how to change 
the system. 
 
 
 
----------------------------------------- 
 
Demand for Financial Services Under Study 
 
----------------------------------------- 
 
 
 
¶7. (U) UNDP reported it is currently embarking on a financial 
sector review in the area of banking and microfinance.  In 
particular, it is looking at the delivery of banking services at 
the state level, and banking capacity at the branch level in 
Eastern Sudan.  According to a UNDP representative, their initial 
findings show that the GoNU's regulations are causing great losses 
within the sector.  The World Bank and the United Kingdom are 
collaborating with the NGO, FinMark Trust to undertake a survey of 
consumer perceptions of financial services and how consumers source 
their income and manage their financial lives.  Alatabani said the 
study would show what types of financial services are needed, and 
the resultant trends will serve as a guide for financial 
institutions and the private sector.  Alatabani said that the World 
Bank and UK Department of International Development (DFID) are 
conducting a separate study to look at Sudan's financial sector 
from the demand side using street surveys.  In addition, the World 
Bank has produced a "Country Economic Memorandum," currently in the 
clearance process.  A subsequent "Financial Sector Review" which 
incorporates sections on SMEs, leasing, and insurance will be 
published in June or July.  This review will cover diversification, 
production, productivity of institutions and markets, South Sudan 
and Darfur and regional differences. 
 
 
 
--------------------------------------------- 
 
KHARTOUM 00000332  003 OF 003 
 
 
Sudan At Bottom of Finance, Services Rankings 
 
--------------------------------------------- 
 
 
 
¶8. (U) Uli Mans, a Ph.D. candidate at the AIMID, presented 
"Khartoum's Position in the Global City Network," his research 
identifying Khartoum at the bottom of the international rankings in 
the advertising and accountancy sectors.  In addition, the research 
shows that Khartoum ranks 459 out of 480 countries in the financial 
sector, according to Mans' survey statistics.  Combining the 
services and financial sector, Khartoum ranks 380.  Man noted that 
if South Sudan were added, the numbers would be significantly 
lower. 
 
 
 
¶9. (U) Mans told the group that law firms, restaurants, travel 
agencies, insurance and reinsurance firms, and photo studios are 
among the top ten types of companies currently operating in 
Khartoum.  According to researchers, tourism, ICT (Information 
Communication Technology) /telecom, transport and logistics are 
among the types of companies likely to expand in the future due, 
according to Man, to the steady flow of business travelers to 
Khartoum.  The GNU is currently promoting three sectors, tourism, 
finance and telecom, for expansion. 
 
 
 
¶10. (U) Comment: Sudan's potential for economic growth is obviously 
stunted by its unhelpful banking policies, its lack of a strong 
financial infrastructure, and U.S. and international economic 
sanctions.  However, Sudan's most pressing problem is not with 
strengthening the banking system, but with creating one that works 
for the entire country post 2011.  The IMF is currently performing 
a review of Sudan's banking system comprised of two banks 
(Islamic/Commercial) and one central bank.  The IMF will look at 
how a restructured banking mechanism could work in the future. 
With the coming elections and referendum, political priorities for 
both the North and the South will be to decide whether Omar Al 
Bashir's regime will remain in power and if there will be one or 
two Sudans.  Donors welcomed the upcoming World Bank, DFID and 
UNDP-sponsored assessments.  The United States will undoubtedly be 
called upon for financial resources to help pay for the projects. 
End Comment 
ASQUINO