Central Bank Directs Banks to Conduct Liquidity Risk Stress Tests

Sudanhorizon – Hala Hamza

Eight directives, cautions, and risks have been repeatedly issued by the Central Bank of Sudan through its monetary policies and circulars to banks from 2023 up to the announcement of the new monetary policy for 2026. These focus on sudden liquidity shocks that the banking sector and banks may face, stressing the importance of reducing the likelihood of disruptions to financial intermediation, establishing a permanent framework for emergency and liquidity management, conducting liquidity risk stress tests, developing an early warning system for real-time monitoring of cash flows, and updating and implementing liquidity requirements to ensure the fulfillment of short-term obligations and align them with the efficiency of payment and settlement systems.

They also emphasize enhancing transparency and disclosure of liquidity levels.

Specialists told Sudanhorizon that the purpose of the Central Bank’s directives is to protect banks and shield them from economic shocks and unexpected events by imposing supervisory decisions that require the implementation of liquidity stress tests, preparing banks to confront sudden adverse events.

The general manager of one of the major banks told Sudanhorizon that these cautions issued by the Central Bank of Sudan are administrative in nature and aim to raise banks’ awareness and obligate them to anticipate market risks, preserve available liquidity, and refrain from granting financing except after verifying clients. He pointed to the Central Bank’s keenness on ensuring that banks select their clients with a high degree of selectivity.

He attributed the repeated warnings by the Bank regarding these risks to the problems currently faced by banks, including market and liquidity risks and political and economic instability due to the war, which is approaching its third year since its outbreak in April 2023.

In a previous circular, the Central Bank explained to banks the motives behind issuing these directives—particularly stress tests—stating that their purpose is for banks to use various techniques to assess their ability to withstand crises under harsh operating conditions by measuring the impact of such crises on a set of the bank’s financial indicators, and their complementary role to banking risk management tools.

Economic analyst Dr. Haitham Fathi told Sudanhorizon of the importance of banks using stress tests to examine their capacity and capabilities to perform their functions under the most severe and potential conditions, based on difficult and harsh scenarios.

Fathi confirmed the possibility of banks using stress tests to assess their financial resources, capacity, and capabilities in both emergency and normal conditions alike.

He said that this measure reflects the Central Bank of Sudan’s commitment to ensuring that banks select their clients with high selectivity.

Fathi explained that banks’ previous reliance on real estate collateral caused major liquidity problems due to declining property prices and reduced purchasing power, as a result of the recession experienced by the Sudanese economy.

He added that since the eruption of the global financial crisis in mid-2007 and the collapse of major international banks with significant losses, central banks worldwide have been keen on requiring commercial banks to conduct what is known as banking stress tests—also referred to as pressure or resilience tests—where banks subject their financial positions to a number of worst-case potential financial scenarios that may affect banking activities, with the aim of identifying banks’ financial strength and solvency and their ability to withstand the most difficult economic conditions, and linking this to capital size and the policies adopted in managing various risks.

In February 2023, the Central Bank of Sudan directed banks to prepare the necessary scenarios for stress tests covering six risks, including (liquidity risk, financing risk, concentration risk, market risk, equity investment risk and rate of return, and operational risk).

The Bank obligated banks to establish a specific strategy for managing market risk that includes, at a minimum, the desired risk position in accounting records and management principles under normal conditions and in cases of high volatility in securities prices and interest rates, as stipulated in the internal regulations of commercial banks and branches of foreign banks.

The Bank also required banks to include specific perspectives for unrestricted and restricted investment account holders in the stress testing program and various financing risks, including non-performing financing and related parties that may be exposed to major financing risks in the future, as well as changes in capital requirements, the quality of financing, rate of return risk, and collateral values.

The Bank directed the conduct of tests on retail financing portfolios, mortgage-backed real estate financing portfolios, real estate, murabaha transactions on commodities, and capital investments.

The Bank stressed the necessity of evaluating stress testing programs as part of the financial impacts that could harm banks’ reputations due to non-compliance with Sharia provisions.

The Bank affirmed that conducting liquidity stress tests contributes to enhancing public confidence in the stability of the banking sector by publishing stress tests at the aggregate banking sector level to reassure the public and stakeholders of the sector’s ability to withstand shocks and elevated risks.

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