KHARTOUM Over a cup of tea, Sudanese broker Hamid is explaining to a Yemeni bourse investor that he won't be able to get his hands on the returns he is owed after many years of investing in the African country's Islamic bonds.
Hamid offers just one legal route for foreigners who want to get out of the Khartoum bourse and reduce their exposure to the country's economic chaos: reinvest the dividends paid out in local currency, into real estate for example, and wait for better times to take your money home.
"Foreigners are stuck. You can't convert bond payments into dollars legally. You need to find other ways, maybe reinvest," Hamid tells the visitor in his office next to the trading hall.
That may largely explain why brokers say few Gulf investors have been trying to pull their money out of the small bourse where shahamas - short-term Islamic bonds - account for 90 percent of trading.
But there is also some evidence that investors from Saudi Arabia and other oil-producing Gulf countries have not given up on Sudan, despite the country's loss of three-quarters of its oil production when South Sudan became independent in July 2011.
With Islamic bonds guaranteed by the central bank, almost 2 million sukuks were traded in the first five months, compared with 1.2 million in the same period a year ago - and around 20 percent of shahamas are held by foreign investors, according to bourse estimates.
Desperate to raise money, the government and state firms have increased their annual bond returns to up to 22 percent, from 14 percent a year ago.
"In the Gulf you are lucky to get 5 percent so, if you are willing to take risks, Sudan could be the right place," said Jarmo Kotilaine, chief economist at Saudi lender National Commercial Bank.
Gulf investors tend to accept the many risks in Sudan because they have known the country a long time, he said.
Lured by double-digit yields, investors from the Gulf in particular bought into government bonds when Sudan was awash with oil revenues that also fed a construction boom in Khartoum.
Since South Sudan's independence, Sudan has been strapped for cash: oil was the main source not just of revenues but also of dollars.
To preserve money for food imports, the central bank has made it almost impossible to convert shares or bonds denominated in pounds into dollars for transfer abroad.
Broker Hamid said it was complicated to send gains from bonds or shares abroad by changing pounds into dollars on the black market, but it was still worth it. Authorities turn a blind eye to avoid upsetting foreign investors.
"Some investors ask me to go to the black market to get dollars for their investments so they can get their bond payments," said Hamid, who does not want his full name mentioned because some of his advice may not be legal.
"Investors won't get 20 percent in the end but I can guarantee at least 7 percent. That's better than most other markets and many are happy with it."
While the Yemeni investor decided in the end to use his sukuk gains to buy a land plot by the Nile in Khartoum, other foreigners are buying gold with their gains, brokers say.
Sudan is boosting its gold production to replace the loss of oil. Much of the output comes from artisan diggers who offer it openly on the Khartoum gold market.
With Sudan under U.S. trade sanctions since 1997, because of its past role in hosting militant Islamists such as Osama bin Laden, Western banks shun the African country which is rich in minerals and fertile land.
But investors from Gulf countries have been very active here since the 1980s.
The Khartoum bourse is located on a floor of Saudi Islamic lender Al Baraka Banking Group. Just down the street lies Bank of Khartoum, which is owned by Dubai Islamic Bank. Qatar National Bank (QNB) is also in town.
After years of construction-fuelled lending, the foreign banks now wrestle with sluggish retail demand, spiraling inflation and restrictions on dollar transfers.
Bank of Khartoum, the biggest privately owned bank, has stopped arranging corporate bonds due to high default risks. Even so, it plans to open 15 new branches across Sudan this year.
The Sudan pound's sharp decline has provided some lenders with windfall foreign exchange gains, bankers say. Bank lending totaled 21.5 billion pounds ($4.7 billion) in June, similar to previous months, according to the latest central bank data.
The stock market has succeeded in boosted trading, with the help of Oman, by launching a computer-based trading system in January, ending the era of scribbling prices on white boards.
The bourse's total trading volume rose to 1.24 billion pounds in January-May, compared to 0.8 billion pounds a year earlier. At least nine new firms have listed their shares since January.
"This is the result of the new system because deals can be done more efficiently and transparently," said Abdelrahman Abdelmajeed Nadir, the exchange's deputy head.
But hopes that the computerized bourse would give foreigners better access have yet to be realized. Traders say the system has not been connected yet to banks, brokers and the central bank. Dealers sign off deals on papers after the daily one-hour session.
And the central display screen broke down after just a few months, a common sight in Sudan where technology spare parts are scarce due to the U.S. embargo and dollar shortages.
"There is no online trading yet," said the director of a large brokerage, asking not to be named. "The system is only linked to desktops in the hall. It's like you put a calculator in a room and call it an electronic bourse."
Only two cross-listings with Dubai and Abu Dhabi exist on the bourse which has a market value of 8.1 billion pounds ($1.8 billion), a fraction of Dubai Financial Market's $29 billion.
UK fund investor Silk Invest has decided for now against bond and share investments. "There is a lot of local Islamic issuance ... The coupon is attractive enough but it is denominated in local pounds and foreign exchange is problematic," said Chief Investment Officer Daniel Broby.
For ordinary Sudanese, buying shahamas is the only way to minimize the impact of inflation of 41.6 percent, triple the 15 percent in June 2011, the last data before southern secession.
"It pays 19 percent return so this is not good but better than nothing," said Salma, who works in the financial industry.
($1=4.6 Sudan pounds)
(Reporting by Ulf Laessing; Editing by Ruth Pitchford)