AGRICULTURAL BANK ABANDONS CORRUPT PAST, LOOKS TO

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 001361

SIPDIS

PLEASE PASS TO DEPARTMENT OF TREASURY FOR G. MULLINAX

E.O. 12958: DECL: 05/24/2015
TAGS: EFIN EINV PGOV KMPI YM ECON COM
SUBJECT: AGRICULTURAL BANK ABANDONS CORRUPT PAST, LOOKS TO
PROFITABLE FUTURE

REF: SANAA 328

Classified By: Ambassador Thomas C. Krajeski for reasons 1.4 b and d.


1. (SBU) Summary. The Yemen Cooperative and Agricultural
Credit Bank (CACB) is moving away from a history of
corruption and poor banking practices and positioning itself
as a viable commercial bank. The MEPI-funded Financial
Services Volunteer Corps worked with the bank May 14-18 to
craft a proposal for restructuring. The program will be
funded primarily by USDA PL480 funds. Bank Chairman Moayed
is an impressive reformer with political ambitions. He has
made progress in cleaning up the bank, but long-term changes
require a comprehensive restructuring effort that includes
professional management and banking practices. As one of the
few institutions able to make small loans to farmers, the
bank plays a key role in rural development and is strongly
supported by USAID. Although Moayed is clearly moving in the
right direction, the CACB is still state owned and must
overcome a number of political obstacles on its way to
commercial stability and profitability. End summary.

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FSVC is the Doctor, Ag Bank the Patient
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2. (U) The Cooperative and Agricultural Credit Bank (CACB)
took its first steps towards restructuring on May 14, with a
week long visit from the Financial Services Volunteer Corps
(FSVC). Funded by MEPI, FSVC specialists Geoffrey Milton and
Alan Deines visited Yemen to offer technical advice and help
develop a restructuring strategy. The volunteers' trip
objective was to develop a targeted proposal to solicit bids
from consulting companies. In FSVC's view, it was essential
that the RFP fall within the CACB's budget and meet the
criteria of both the bank and the Mission.


3. (C) The CACB is one of four government-owned banks and,
until recently, functioned as a conduit for ROYG grants to
agricultural and military interests, under direction from the
Ministry of Agriculture. According to FSVC, "the bank has
suffered from inadequate management and operated at the whim
of local political forces." The chairman himself, Hafedh
Moayed, admits that the accounts were rife with corruption,
saying that any CACB financial statements from before the
beginning of his tenure in 2004 are essentially worthless.
Many bad loans remain on the books, and it is unclear if the
ROYG will absorb these losses or force the bank to cover them
with earnings. The CACB only received a full banking license
from the ROYG in 2004, and is now looking to become a
universal bank with the full range of banking services. "You
are the doctor," said Moayed to the volunteers, "and we are
the sick patient. You are here to cure us."


4. (SBU) In the volunteers' view, Moayed represents a new era
for the CACB. The Chairman has a strong reputation as a
reformer from his days as Customs Director, and was appointed
to his current position with a mandate to modernize and
improve the bank's operations (reftel). FSVC believes that
Moayed's long-term goal is to privatize the bank and manage
it according to international standards. In the short run,
the Chairman has revised the lending strategy to balance
small and big loans and increase the returns on both. He is
also determined to conduct the restructuring bid according to
international standards. Nevertheless, FSVC identified many
daunting challenges that remain in reshaping the CACB. The
RFP outlines necessary reforms in staffing, organizational
structure, capital reserves, earnings, risk management, IT,
and the lending function.

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CACB Shows Promise, Needs to Clean House
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5. (C) Milton and Deines agreed that many of the bank's 1200
employees are relics of the political past with few real
banking skills. This includes the bank's current Managing
Director, Yahya Sabri, who was appointed to the CACB by the
President over twenty years ago and has no clear function.
Many other departments need extensive training if they are to
perform essential functions in lending and risk management.
(Note: The CACB's efficient international banking department
is an exception to this rule, and is led by a professional
banker hired from Dubai. End note.) Before Moayed's tenure,
a restructuring effort funded by the Embassy of the
Netherlands ran aground when it recommended firing high level
staff. FSVC did not repeat this mistake, but did recommend
hiring professional banking specialists as General Managers
and extensive retraining for the existing staff. Moayed
received these recommendations well, and immediately tried to
hire an executive from the International Bank of Yemen as
CACB General Manager for banking.


6. (SBU) Despite the many challenges, there are a number of
promising signs at the CACB. In 2004, the ROYG agreed to
increase the CACB's capital to six billion Yemeni Riyals
(31.4 million USD) by 2007, through conversion of long-term
debt previously owed to Yemeni government bodies. The
Central Bank, which pays almost all public employee salaries
directly, recently decided to issue teachers' salaries at the
Amran branch of the CACB. With 35 branches and four under
construction, the CACB is the only bank in Yemen that is
truly national. To link this system electronically, the bank
recently embarked on IT overhaul, funded by the Arab Monetary
Fund.

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USAID and Agricultural Banking
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7. (U) Agricultural investment is essential to Yemen's
development, but there are few mechanisms for lending to
small farmers. (Note: Approximately eighty percent of
Yemenis derive their income from agriculture. End note.)
Commercial banks are reticent to issue loans to unfamiliar
borrowers. Without strong rule of law and with traditional
Islamic opposition to interest charges, every loan in Yemen
is high risk. Agricultural loans present specific
challenges, as the average loan processing period is six to
nine months-- too long to accommodate a crop cycle. With its
national bank network and dedicated agricultural lending
funds from the ROYG, the CACB is a natural partner for USAID
agriculture programs. As such, FSVC's report maintained
rural development as a key part of the bank's business,
recommending the bank hire a professional manager for
agricultural banking. The report also stressed the
importance of strengthening Yemen's legal infrastructure to
support sound lending practices, and technical assistance and
training for customers emphasizing their responsibility to
repay loans. For these efforts to succeed, however, the CACB
must be a functional and reliable banking institution.

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More Work to be Done
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8. (SBU) Following FSVC's formal report to the CACB, some
steps will remain before the RFP can be submitted. FSVC
agreed to check with advisors to make sure the tendering
document follows proper legal standards. The volunteers
requested that USAID share the document with contractors to
determine if the restructuring project will fall within the
proposed budget. Once the bids are received, the CACB will
likely require additional guidance in the selection process
and in managing the role of the consultant in the
restructuring process. FSVC suggested that there may be
available funds in the future to continue working with the
bank.

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Main Challenge is Political
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9. (C) Comment: The success of the restructuring plan
proposed by FSVC depends largely on political factors.
Chairman Moayed is an energetic leader who has already made
impressive reforms at the CACB, but he is a politician and
not a banker. There are persistent rumors that Moayed will
be promoted to head of the Yemen Central Bank in a Cabinet
reshuffle (reftel). This could be good news for Yemen, but
could also undo the progress Moayed has made at the CACB. It
is essential that the Chairman hire and empower banking
professionals who can carry on reforms once he has departed.
Political problems also have the potential to plague the
restructuring bid itself. Despite FSVC's light touch, it is
clear that running a profitable bank will require layoffs of
ineffective staff, some of whom have strong political
protection. If you want to gauge Moayed's commitment to this
process, said Deines, tell him to fire the Managing Director.
It also remains unclear whether the RFP must be submitted to
the ROYG's High Tendering Committee, which lacks both
transparency and credibility. FSVC and the bank agreed that
it would be preferable if they evaluated the bids directly,
with the guidance of the Mission. In general, Moayed's goal
is to distance the CACB from the ROYG, and allow a
professional banking system based on the bottom line.
Preventing ROYG meddling will be a test of Moayed's rising
star. End comment.
Krajeski