Development of the Banking Sector in South Sudan
In a March speech to the National Legislative Assembly, the Minister of Finance and Economic Planning for the Republic of South Sudan, Kosti Manibe Ngai, declared that “…The Ministry of Finance will be signing contracts with two commercial banks in the coming months so that revenues can be paid directly into the banking system, not to government officials.” The statement appearing as item 16 of 32 points in his speech failed to convey the severity of the banking situation in South Sudan where the financial sector is small and underdeveloped and the only recourse available to the government to manage its finances is the use of officials to hold and disburse funds. According to a 2011 report issued by the Congressional Research Service, an estimated 1% of the population actually has bank accounts. While oil dominates the economic discussion between Sudan and South Sudan, equally critical to the South is the development of a banking infrastructure.
Prior to Sudan’s independence in 1956, the Sudanese banking system was comprised of commercial banks that were branches of non-indigenous expatriate institutions. Sudan, at the time, did not have an independent currency or a central bank. Following independence, the Sudan Currency Board was established in 1957 to issue a currency. The Bank of Sudan Act was passed two years later in 1959 establishing a central bank. In the following year, the Central Bank of Sudan was formed becoming one of the first operational central banking institutions in Africa. The Bank assumed responsibility for the administration of foreign exchange, and the issuance of currency. In 1970, the government of Sudan nationalized the commercial banking sector but by mid 1970’s, it eased its restrictions and private foreign banks, catering to expatriates and trade operations, were permitted to open branches in Sudan.
In the 1970s, the concept of Islamic banking appeared in the region and Sudan became a major proponent of the system. In fact, Sudan today is a major player in Islamic banking both in utilization and development of Islamic banking instruments. Sudan eventually converted its entire financial system in the 1990s to an Islamic financial model. Banking in South Sudan was part of the banking system in the rest of Sudan.
The Comprehensive Peace Agreement, signed in 2005, provided for a dual banking system in Sudan during the interim period. The Bank of Southern Sudan was established as a branch of the Central Bank of Sudan. The Sudan continued to operate under an Islamic financial system and the South established a conventional banking system. The Bank of Southern Sudan was managed as a conventional window of a dual banking system. Both Sudan and South Sudan maintained one monetary policy directed by the Central Bank during this period and the Bank of Southern Sudan was responsible for chartering and supervising financial institutions in the South.
After independence in 2011, the Bank of Southern Sudan began to operate as the central bank for South Sudan with a mandate to monitor policy and price stability, and ensure a stable exchange rate. However, the country still has to rely on its neighbors such as Kenya and Uganda for its external financial transactions such as money transfers. The current situation for the banking sector is quite limited with minimal geographic coverage for banks and a weak regulatory framework and limited management capacity and expertise. There are a small number of commercial banks in the country – the majority of which are owned by banks in Kenya and Uganda. The services provided by the banks are limited to foreign exchange transactions for remittances and bank transfers. The provision of loan, finance, and savings transactions are limited. Complaints by customers in the online and printed media are rampant regarding the quality of service and high transaction charges. The sentiments in the country regarding the Kenya and Uganda owned banks are very negative with charges of exploitation leveled at the banks.
To date, very little data is available regarding the state of the Bank of South Sudan and the health of the financial system is in doubt especially after the collapse of the oil-exporting sector earlier this year. Prior to the shutdown of the pipeline, oil accounted for 98% of the economy and provided the foreign currency needed for imports. The situation is perilous for a nation that imports almost all of its consumption and the lack of foreign currency drove inflation up over 60% in July this year. After trading 3.5 to a dollar in January, the South Sudan Pound dropped to 5 last month and is trading at about 4.4 after the Qatar National Bank stepped in with a $100 million to fund imports in September.
Regardless of the economic situation, it is imperative that South Sudan focuses on developing a solid, reliable, and transparent banking system offering expanded services such as loan, finance, and savings transactions. It may behoove South Sudan to work with Sudan to take advantage of the Sudan expertise in banking and their shared economic interests until the South develops its own indigenous talent to manage the financial sector. Without a financial system, operating under a strong regularity framework the entire future economic development of the nations will be in question.