COMMERCIAL BANKS IN YEMEN: WHOM CAN THEY LEND TO?

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 000073

SIPDIS

E.O. 12958: DECL: 01/08/2010
TAGS: ECON EFIN KMPI YM ECON COM
SUBJECT: COMMERCIAL BANKS IN YEMEN: WHOM CAN THEY LEND TO?

REF: SANAA 56

Classified By: Charge d'Affaires Nabeel Khoury for reasons 1.5 b and d.


1. (U) Summary. Commercial banks are underutilized in Yemen,
slowing the flow of capital and preventing investment in
domestic development. Few Yemenis deposit their savings with
banks, and loans are available only to an elite few. The
lack of lending stems from a weak judicial system, poorly
defined property rights, the absence of a viable credit
rating system, and mutual suspicion between banks. During a
MEPI-sponsored visit by the Financial Services Volunteer
Corps, the delegation visited most of Yemen,s major
commercial banks, as well as the Ministry of Finance, the
Central Bank of Yemen (CBY),and the Aden Development
Authority (CBY meetings covered reftel). End Summary.

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Banks irrelevant to most Yemenis
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2. (U) Banking in Yemen is still in its infancy and well
below international banking sector standards. There are
currently 17 commercial banks, four of which are Islamic and
four that are government owned. Of these, only the
International Bank of Yemen, Tadhamun, Arab Bank, and the
Calyon investment bank can be considered credible banking
institutions. The others lack basic capital requirements,
the technical capacity to link their branches, or the
management expertise to do core banking. The capital base of
most Yemeni banks is small, and only three percent of Yemenis
hold bank accounts. There are a total of 500,000 accounts in
all of Yemen's banks combined, and many of these belong to
the same customers. Trust in banks is growing, but low
incomes, a cash economy, and the inefficiency of the banking
system make banks irrelevant to most Yemeni citizens.


3. (U) Lending makes up only a very small part of commercial
banking in Yemen. For instance, loans make up only about six
percent of the National Bank of Yemen's (NBY) portfolio
(formerly the Central Bank of South Yemen). Arab Bank lends
only eight percent of total deposits. The NBY, like other
Yemeni banks, makes the bulk of its investments,
approximately 80 percent, in government T-bills). Barring a
complete collapse of the government, these guaranteed
investments provide return without risk. Contrary to
statements by the CBY (reftel),Ahmed Hamdani, Chairman of
Watani Bank, believes that T-bills dry up investments in
other projects. Loans in Yemen are approved mostly for trade
financing and not for smaller investments, such as home or
small business loans. Almost all loans are short-term,
usually a year or less, with high interest rates (over 20
percent, with a margin of 10-15 percent),making it difficult
for small borrowers to finance investments. Businesses
familiar to the banks are able to obtain automatic renewals
of short-term loans, allowing them to finance larger
investments.

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Obstacles to Lending
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4. (C) Bankers and ROYG officials agree that the biggest
obstacle to lending is a weak judicial system. Banks have
little confidence that they will be able to collect on
delinquent loans when they know such cases may be tied up in
court for as long as ten years. Even when the courts rule in
their favor, the authorities generally do not enforce
collection. Mahdi Alawi, Director of Arab Bank in Yemen,
claimed that judges are corrupt, saying a standard bribe is
10 percent of the final award. Even honest judges will often
rule that charging interest is against Islam and award
lenders only the principle of the loan.

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Mafia Tactics
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5. (C) Because of these obstacles, executives at the
International Bank of Yemen (IBY) confessed that they have
resorted to "mafia tactics" to collect outstanding loans.
There is a Bank Arbitration Center in Sanaa, which is
supposed to conduct extra-judicial mediation, but Ahmed
al-Absi of IBY said that since borrowers know they can get
off the hook in court, it is not widely utilized. As a
result, banks lend almost entirely to customers they know
personally. Alawi contended that Yemen needs an entirely new
generation of judges that are both honest and schooled in
modern commercial law. The Ministry of Finance also
acknowledged this problem to FSVC and suggested special
banking courts with non-Yemeni judges.

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Possession is Nine-Tenths of the Law
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6. (U) Since property titles are often duplicated or
disputed; there is no reliable form of collateral in Yemen.
Such property disputes are often resolved by force. The ROYG
has not passed a specific law on property and, according to
Alawi, Yemen is the only country where it is considered
against Islam to use land as collateral. Property holdings
are not recognized by the CBY when it calculates a bank's
capital ratio (the hard assets a bank has against its
liabilities) and the CBY decides how much risk a bank may
take on. Since the ROYG does not recognize the legal value
of property, neither do banks.


7. (C) Banks have few tools to determine the credibility of
its customers. Most businesses in Yemen practice poor
accounting. Officials at all the banks agreed that local
CPAs and tax auditors are widely considered untrustworthy and
corrupt, willing to falsify balance sheets in exchange for
bribes. There is also no functioning credit bureau. The CBY
keeps a blacklist on borrowers who have defaulted, and
commercial banks are required to provide this information to
the CBY, but the system is not effective. The list only
includes bad loans of over 5 million riyals, so there is no
information on small borrowers. According to Alawi, powerful
figures sometimes physically threaten officials of the CBY
and private banks in order to keep their names off the list.
Hamdani confirmed this, saying that an independent credit
bureau is similarly impossible because of the potential for
tribal violence in response to bad ratings. Without a
centralized credit bureau, each bank must rely on its own
records, which it is unlikely to share.


8. (U) Alawi said in many cases banks are their own worst
enemies, lending to bad borrowers because of personal
friendships, or for fear of losing customers to other banks.
The Banking Law forbids insider lending, but this is rarely
enforced in the case of character loans.

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No lending, no Development
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9. (U) Ahmed Ghaleb at the MOF boasted that because of the
Ministry,s 1997-8 reforms, all Yemeni banks are now liquid.
However, liquidity is no longer the main problem. By law,
banks are required to be 30 percent liquid, but most are
between 60-70 percent because they cannot find reliable
places to lend the money they have. This means that Yemeni
banks are sitting on cash that could be used to stimulate the
dormant economy through lending.


10. (U) Officials at the MOF and the CBY say that commercial
banks are hurting development with their unwillingness to
take any risk through lending. There are few viable
businesses, however, to which banks can lend. Applicants
rarely have collateral or feasibility studies for their
investments. Most are one-man-shows that depend on personal
relationships to obtain loans or credit. Alawi said that the
ROYG could improve this by establishing real property
registries and passing a leasing financing law. That law is
currently being drafted at the CBY, but Alawi remained
pessimistic about its implementation.


11. (C) Development is also hampered by a lack of trust
between individual banks, which are afraid to reveal their
financial status and therefore will not lend to each other
(reftel). Alawi believes this distrust could be eliminated
if the CBY had a competent oversight capacity and its
auditors were not subject to corruption. (Note: The CBY
inspects the banks annually, but their techniques are
predictable and little information is released to the public.
End Note.)


12. (U) Banks have difficulty undertaking joint financing of
large development projects, and as result they are generally
funded from abroad. This problem is evident in Aden, where
Yemeni banks are unable to finance private development
projects for the Aden Port and the Aden Free Zone, both
critical to Yemen's economic future. Representatives of Aden
banks formed a committee to tackle this problem, but
according to Mohamed al-Muflehi at the Aden Local Development
Office, so far the banks have failed to overcome their mutual
distrust. The lack of cooperation is especially evident in
the bankers associations, each of which Hamdani reports,
operates like the personal domain of the powerful banking
families. Such rivalry prevents the associations from
reforming their own practices or lobbying the ROYG.

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Attempts at Modernization
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13. (U) Comment: Yemen's major banks are attempting to find
strategies to encourage Yemenis to use the banking system.
NBY is offering new high-yield investment funds. Watani is
looking to offer 2-3 year medium-term loans to small and
medium-sized businesses. IBY is opening ATMs and launching
point-of-sale purchases as well as debit cards. Many banks
are offering Islamic lending products (common in GCC
countries) as a means of avoiding prohibitions against
interest. Some banks now cooperate with government
ministries to offer medium-term loans, with monthly
deductions taken directly from employees' paychecks. These
efforts, however necessary and well meaning, are unlikely to
have much of an impact without major improvements in the
financial system, including rule-of-law, effective CBY
oversight and modernization, and a viable credit system to
support lending. End Comment.
KHOURY