Settlement of Non-Performing Debts Begins Between Banks and Microfinance Institutions

Sudanhorizon – Hala Hamza

Reliable sources have told Sudanhorizon that microfinance institutions covered by the Central Bank of Sudan’s recent circular on non-performing loans have begun settling their outstanding debts with creditor banks.

Under the settlement arrangement, the principal amount of the debt will be repaid in installments, while accrued profits (interest or financing returns) will either be fully waived or substantially reduced.

Sources described the settlement decision as a positive development, particularly since most struggling microfinance institutions and companies had found little support in resolving their financial difficulties. They had also faced mounting pressure from banks to accelerate repayments, while Sharia supervisory bodies remained silent, insurance companies failed to provide assistance, and guarantees issued for microfinance facilities could not be liquidated.

The manager of a distressed microfinance company, who requested anonymity, welcomed the settlement agreement with creditor banks. Speaking to Sudanhorizon, he said any initiative aimed at easing debt burdens represents the beginning of a solution to one of the sector’s most complex challenges, noting that the industry had remained largely inactive throughout the years of war and under exceptionally difficult economic conditions.

He explained that many microfinance institutions became unable to meet their financial obligations not because of weaknesses in their business models, but due to force majeure circumstances that led to the suspension of operations, the loss of financing portfolios, disruption of collection activities, and the closure of entire branches.

The Central Bank of Sudan recently instructed commercial banks to immediately intensify efforts to recover non-performing financing by activating debt collection departments, follow-up committees, and all relevant procedures to collect outstanding debts.

The central bank also authorized banks to initiate legal proceedings and liquidate or take possession of collateral in order to mitigate the negative impact of banking sector defaults on the financial stability of banks and their ability to continue performing their financial intermediation role, particularly during the ongoing war.

Mohamed Babiker, Managing Director of Al-Fal Microfinance Company, told Sudanhorizon that most repayments on the company’s financing are made either through Salam contracts or in-kind payments.

He said the company has continued collecting repayments from Gezira State and Wad Madani since the outbreak of the war to help prevent shortages of grain supplies.

Babiker explained that part of the financing repayment schedule is aligned with harvest seasons because most of the company’s financing is directed to farmers. He added that repayments to banks are proceeding according to the company’s recovery and emergency response program, with full recovery expected within one to two years.

Institutional development consultant and microfinance expert Nouman Yousif Mohamed said the settlement offers several important advantages, including reducing the financial burden on institutions, ending disputes with banks, restructuring obligations under more flexible terms, and improving institutions’ financial positions compared with allowing debts and accumulated financing profits to continue growing.

However, Nouman cautioned that merely restructuring debt does not create a new source of repayment. He suggested addressing this challenge by extending new financing lines that would enable institutions to resume operations.

To ensure the success of the settlement process, he proposed granting an appropriate grace period before installment payments begin, recapitalizing institutions through shareholders, investors, or supporting organizations, intensifying efforts to recover existing financing portfolios, liquidating underutilized assets to generate liquidity, restructuring operating expenses, and removing an institution’s default status as soon as it meets the required conditions so that it can once again qualify for future financing in accordance with Central Bank regulations.

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