Microfinance in Sudan: Diagnosing the Crisis Before Prescribing a Remedy (1)

Noaman Yousif Mohammed
Microfinance has long been an important instrument in Sudan for broadening the base of economic activity and reaching segments of the population that traditional banking services do not readily serve. For many years, it has helped finance small-scale producers, business owners, artisans, service providers, and agricultural and livestock activities.
However, the sector’s expansion does not necessarily mean its underlying structure is sound. The sector has developed through a range of institutions, companies and programmes with varying financial, institutional and technological capabilities. Meanwhile, challenges relating to long-term funding, governance, risk management, data and capacity-building have persisted to varying degrees. The war then subjected the sector to an exceptional test.
The war exposed the fragility of the system
The war’s impact was not limited to the closure of some branches or the loss of assets. Institutions suffered direct losses, systems and data were disrupted, clients were displaced from their areas of residence, and economic activities underpinning loan portfolios came to a halt or contracted. Consequently, the problem has become much broader than a decline in new lending.
The question is now institutional continuity, portfolio quality, funding, data, human and technological capacity, and confidence in the sector’s ability to recover.
We must recognise one important point: the war did not initiate the microfinance crisis, but it deepened existing weaknesses and exposed the need to reconsider how the entire system operates.
Capital: a necessary condition, but not a complete solution
It is natural for the regulatory authority to impose requirements on capital adequacy, governance, and risk management. A financially or administratively weak institution cannot serve as a safe channel for funds provided by depositors or financiers. However, as important as capital may be, it does not represent all the resources available to a microfinance institution. At its core, such an institution is a financial intermediary that needs funding to build a loan portfolio, finance clients, and recycle funds.
This brings us to an equation we must not overlook: capital is a condition for continuity, governance is a condition for confidence, and funding is a condition for operations. Addressing capital and governance without tackling access to funding may therefore produce institutions that meet regulatory requirements but cannot perform their intended functions.
Institutions are not all in the same position
Microfinance institutions should not all be treated as though they were in the same situation. One institution may need to increase its capital. Another may require restructuring. A third may need to improve its governance, management and risk controls. A fourth may meet all the requirements but be unable to access funding. Some institutions may no longer be viable, so a merger or orderly exit may be the best option.
The first professional step, therefore, is to classify institutions objectively rather than apply a single policy to all of them. The aim is not to rescue every institution at any cost, but to preserve viable institutions and safeguard microfinance’s role in the economy.
Distress does not have a single cause
One of the most important issues requiring professional attention is distinguishing between financial distress caused by weak management and poor lending practices and distress imposed by war.
Distress resulting from inadequate credit assessments, weak monitoring or poor loan recovery should be addressed through appropriate regulatory and credit-management measures.
However, some distress results from the suspension of economic activity, client displacement, asset loss, disrupted markets and value chains, business damage, or data loss. The two situations should not necessarily be treated with the same tools.
Recognising the impact of war does not mean abandoning credit discipline. Equally, applying rules on financial distress rigidly should not prevent the rescue of an institution that is fundamentally sound and capable of recovery.
Banks are part of the solution
Microfinance institutions cannot rebuild their operations in isolation from the banking system. Banks are an important source of the funding these institutions need, but they are also required to manage their own risks and comply with their credit policies.
This creates a genuine dilemma. An institution needs funding to recover, while a bank may hesitate to finance it because of past distress. Yet the absence of funding may itself prevent the institution from recovering.
This cycle cannot be broken by calling for money to be injected without safeguards. Nor can it be broken by a policy that closes the door to financing for every institution affected by the war. What is needed is recovery financing, not the refinancing of distress.
From rescuing institutions to safeguarding the function
Microfinance is not merely a commercial activity undertaken by a group of institutions. It is a channel for reaching small-scale producers, small-business owners, farmers, artisans and service providers. It can play an important role in revitalising local economies after war.
The exit of a viable institution from the market therefore represents a loss greater than the disappearance of a business entity: it may mean losing a financing channel that serves thousands of clients. Conversely, keeping an institution in operation when it lacks the capacity to manage itself or bear risks serves neither the sector nor its clients.
The right equation, then, is to safeguard microfinance’s function, not necessarily to rescue every microfinance institution.
This leads us to the next question: if an institution meets the capital and governance requirements and is viable, where will its funding come from?
This is where the sector’s second major challenge begins.
In the next article: Microfinance between the banks and the Bank of Sudan—where will the funding come from, and how can we move from refinancing distress to financing recovery?

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