Product Development —Case Study of Sudan

4.4 Product Development —Case Study of Sudan

Sudan Financial Services Company (SFSC): The SFSC came into being in 1998. Its initial issuance was Central Bank Musharakah Certificates (CMCs), which were well received with high demand. These certificates represented Bank of Sudan’s assets (ownership) in the commercial banking sector. These assets formed a closed-end Fund, managed by SFSC. The primary purpose of CMCs was to serve as monetary policy tool. However, they have been discontinued for several reasons. First, they proved to be costly for monetary management. Being an equity instrument which carried some risk for its holders it required payment of high rate of return. Second, their issue volume was limited by the size of the underlying asset – a monetary tool suitable for open-market operations needs relatively unconstrained availability. Third, the constraint on issue volume became quickly binding because the commercial bank assets were mostly murabaha receivables which cannot be re-traded in the secondary market for a price different from its face value. Doing so would have resulted in violation of shari[ah rule.

The SFSC also started a series of Government Musharakah Certificates (GMC) which are claims on the government owned enterprise and tradable in secondary market. These certificates were started in 2001. Since then 24 issues have been made. Now GMC are also being withdrawn and they will ceased to exist by 2007. A gradual withdrawal process has already been started by not reinvesting the profit in the new issues as the older securities mature. The GMCs are of short-term maturity instruments that mostly ranged from 3 to 6 months but some are also for a year. The net total amount raised under GMC scheme during various years (end December) had been: 12.9 billion Sudanese Dinar (SD) in 2004; SD 9.36 billion in 2003 [0.21 per cent of GDP]; and SD 5.18 billion in 2002 [0.13 per cent of

GDP]. 32

4.4.1 Structure of GMC:

Certificates represented partnership in an identified set of state-owned enterprises. This set of enterprises formed the underlying asset pool of the

32 Author’s calculation based on data from Sudan Financial Services Company; Bank of Sudan; and Central Bureau of Statistics, Ministry of

Finance and National Economy, Government of Sudan websites.

4.4.1.1 Success Factors:

Given the meager alternate opportunities of investment to small savers and risky investment avenues otherwise available to the rich but passive investors the GMCs offered a good prospect. It was safe being backed by government and profitable (the first series ended up paying 32 per cent returns). The certificates were also very attractive to banks as a large number of banks had very small base of major-clients. Most banks had only 4 to 5 major-clients whom they trusted for large investments. Therefore GMC allowed them to avail of earnings with safety.

4.4.1.2 Controls:

A maximum limit was prescribed for banks’ investment in GMCs.

4.4.1.3 Client base:

GMCs were very popular among individuals as well as banks. However, due to a high amount of its minimum denomination of 50,000SD the clientele were mostly institutions and wealthy individuals.

4.4.1.4 Problems:

GMCs were mostly short-term. Therefore government had to issue a new issue every now and then.