WATANI BANK FAILURE THREATENS BROADER FINANCIAL

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 003609

SIPDIS

E.O. 12958: DECL: 12/28/2015
TAGS: ECON EFIN KMPI CASC YM ECON COM
SUBJECT: WATANI BANK FAILURE THREATENS BROADER FINANCIAL
CRISIS

REF: SANAA 3556

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


1. (C) SUMMARY. In early December, the Central Bank of Yemen
(CBY) declared Watani Bank insolvent, and initiated the first
bank closure in Yemen's history. General Manager Dr.
Hamdani, and other bank officials, were arrested and face
charges of financial crimes against the state. Watani's
future remains unclear, but it is likely that the CBY will be
forced to liquidate its assets. The bank suffered from poor
management for several years, lending to its own board of
directors and political insiders, and used political
connections to prevent earlier disciplinary action by the
CBY. Such practices are prevalent at other banks in Yemen,
and could point to a broader financial crisis in the coming
year. END SUMMMARY.

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ROYG Closes First Bank in Yemeni History
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2. (SBU) On December 7, military police appeared at the main
branch of Watani Bank in Sanaa, locked the doors and declared
the bank insolvent. The CBY immediately took control of the
board of directors and froze all accounts. CBY officials
explained that the police arrived in response to rioting
caused by a run on the bank totaling approximately USD five
million, sparked by the CBY's inability to clear checks
guaranteed by Watani. According to Abdullah al-Olafi,
Sub-Governor for Supervision at the CBY, Watani had zero
liquidity and held only its statutory reserves when it
failed. The closure is the first in Yemen's history, with
the exception of a branch of BCCI. The CBY is now faced with
the choice of liquidation, new management, or returning the
bank to its shareholders.


3. (C) Shortly before the closure, police stopped the bank's
General Manager, Dr. Ahmad al-Hamdani, from leaving the
country. The Attorney General's (AG) office issued a warrant
for the arrest of Hamdani and eight other senior bank
officials on December 18. Dr. Hamdani and three others
turned themselves in voluntarily and remain in prison, while
others remain in hiding. (Reftel) Al-Hamdani, a dual
Yemeni-American citizen, appeared in court for preliminary
questioning on December 19, charged with "wasting bank funds"
and of "causing economic damage to the country." The ROYG
froze the bank accounts and real estate holdings of Dr.
Hamdani's relatives, including his children and aunts and
uncles. On December 28, Hamdani submitted an official
request for help from post, asserting that he is being held
without bail and falsely accused of embezzlement. The AG
also took the unusual step of trying Hamdani in the Special
Penal Court, usually reserved for those who pose a "public
danger" or are charged with capital crimes. (NOTE: Though an
odd choice of venue for trying financial crimes, the Special
Penal Court is one of the few well-functioning arms of the
Yemeni judicial system. END NOTE.)

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Watani Survived on Political Connections
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4. (C) There is little question that Watani was experiencing
severe liquidity problems before its closure. Hamdani
himself admitted that Watani suffered from a high volume of
non-performing loans, but blamed his troubles on government
contractors who were awaiting payment from the Ministry of
Finance (MOF). Approximately sixty major contracting
companies, many belonging to well-connected politicians and
tribal sheikhs, have failed to make loan payments. Watani
officials argue that despite direct orders from President
Saleh and Prime Minister Bajammal, MOF refuses to issue
payment for the contracts in question. The CBY counters that
these loans were made without sufficient guarantees and in
violation of banking regulations. Yemen's ineffective court
system and pervasive corruption also make it difficult to
settle such cases -- especially when borrowers have political
connections. (NOTE: It is standard practice for MOF to
delay payment as a means of bridging deficits and extending
contracts into the following year's budget. END NOTE.)


5. (C) Watani began on poor financial footing in 1998, said
Ahmed al-Absi, General Manager of the International Bank of
Yemen, and was mismanaged until the day of its closure. With
only four branches and start-up capital of USD 3 million,
Watani was small even by Yemeni standards. Hamdani, a former
minister of agriculture and economy, had strong connections
with ROYG officials, said al-Absi, and made investments no
other bank would consider. Watani held the equivalent of USD
88 million in deposits (USD 15 million in statutory reserves
at the CBY) and issued loans totaling USD 70 million.
According to al-Absi, Watani made USD 30 million in loans to
the bank's own board of directors, a violation of Yemen's
banking law. Another USD 30 million were issued to
government contractors, many of whom had no credit history.
Some of the loans were made to single individuals in excess
of 15 percent of the bank's total capital, also a violation
of the law. Watani Bank never made a profit in all its years
of operation.


6. (C) The bank conducted little in the way of core banking
services, continued al-Absi, expanding into risky real estate
and insurance ventures. In a desperate attempt to solve its
liquidity troubles, Watani began paying above market rate to
depositors. Three years ago, said Olafi, the CBY forbade
Watani from making additional loans until it had settled
accounts for non-performing loans. Nevertheless, Watani
continued to lend. "Dr. Hamdani is the type of guy who likes
to please his friends and associates," said Fathi Khairi,
Watani's former auditor with Deloitte and Touche.

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Central Bank Acted Too Late
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7. (C) George Mullinax, a banking expert with the MEPI-funded
regional office of the Treasury Department in Abu Dhabi, is
providing technical assistance to the CBY in administering
the Watani closure. The real problem, said Mullinax, is that
the CBY did not act sooner. According to al-Absi, the CBY
gave Watani its lowest ranking for the past three years, and
allowed them to submit a qualified statement allowing for a
deficit of USD 2.7 million. (NOTE: In a qualified statement,
the bank is allowed to make adjustments to its balance sheets
pending future transactions, and is generally prohibited by
central banks. END NOTE.) This should have set off alarm
bells, said Mullinax, and prompted immediate action such as
the replacement of the board of directors. Olafi attempted
to take action earlier, said al-Absi, but was prevented from
doing so because of Hamdani's connections to the President
and other high officials.


8. (C) In general, the CBY followed standard procedure in
closing Watani, said Mullinax, but details are cause for
concern. Military police were left alone with the bank's
cash for an extended period of time, and no CBY officials
were present at the closure. According to bank managers, the
CBY warned government-owned companies and state employees
months ahead of time that Watani was in danger of collapse.
Yemenia and the Yemen Tobacco Company both ceased depositing
funds in their accounts at Watani one month before the
closure. Watani managers accused CBY officials in the
clearing room of warning borrowers that the bank faced
collapse, and urging them to withhold payment. CBY officials
themselves held over USD 100,000 in loans from Watani, said
the accounts manager, which they ceased payments on two years
ago.

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OITC: Mystery Company Interested in Watani Shares?
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9. (C) Hamdani believes he was the target of political
vendettas, accusing the MOF of withholding payment to harm
his business and to prevent him from selling shares to an
international company. According to Hamdani, the Office of
International Treasury Control (OITC),a New York-based
company currently involved in a buyout of Land Rover in the
United Kingdom, expressed interest in purchasing 53 percent
of Watani's shares. According to Yemeni law, foreign
interests may not own more that 49 percent of a local
company. In this case, however, the Central Bank expressed
genuine concern over the legitimacy of OITC. The company has
provided no contact information or business address. OITC
does not have a web site and, according to some investment
experts, may be a hoax. Olafi was perplexed as to why any
reputable international company would buy a small, insolvent
Yemeni bank. If OITC is still interested in purchasing the
bank, said Olafi, they are still welcome to submit a bid.

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Growing Concern for Yemen's Financial Health
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10. (C) There is deep concern within the Yemeni financial
sector about the repercussions of liquidating Watani. A
number of other private commercial banks, including Yemen
Gulf, Yemen Islamic Bank, and Yemen Commercial Bank, face
similar difficulties and could face closure within the next
year. The bulk of Yemen Gulf Bank's loans, said al-Absi, are
to only five or six people, and insider loans are common
practice in most Yemeni banks. Even banks that face no
liquidity problems could be adversely affected by Watani's
troubles. The public's confidence is already low, said
Mullinax, with just over two percent holding accounts. Yemen
has no deposit insurance, and additional bank failures will
frighten away any potential depositors. Yemen's credit
rating could also be harmed with international banks, which
provide essential guarantees for letters of credit to Yemeni
traders. According to the CBY, however, 80 percent of
Watani's loans are non-performing. If this is only partially
accurate, said Mullinax, then liquidation is the only
realistic option without a huge influx of capital from the
ROYG.

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Comment: ROYG Looks to Avert Financial Train Wreck
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11. (C) Yemen's financial system is in serious trouble. With
a large number of family-owned banks and little enforcement
from the CBY, poor management practices abound, including
insider loans, fraudulent accounting, and speculative
investing. There is little question that Hamdani and other
Watani managers engaged in all of these practices. The CBY's
lack of independence exacerbates the problem, by preventing
CBY officials from taking action against well-connected
banking families. In the case of Watani Bank, Dr. Hamdani's
connections managed to keep him afloat for several years, and
widened the impact of Watani's eventual collapse. The long
delay allowed a series of leaks to the public, worsening
Watani's liquidity problems and perhaps contributing to a run
on the bank.


12. (C) Dr. Hamdani is desperate and many of his statements
appear unfounded. It is highly unlikely that OITC (if it
exists),or any other international company, would be willing
to bail out a failed Yemeni company. Hamdani has only
himself to blame for making non-performing loans, but he is
likely correct in accusing the ROYG of non-payment. The AG's
decision to try Hamdani for crimes against the state appears
to be a case of scapegoating, and belies a growing panic
about a broader collapse of the financial sector. The ROYG
is seeking to recoup whatever assets it can, whether from the
bank, Hamdani, or anyone in his family, to restore confidence
in the banking system. Even if Hamdani is proven guilty, he
cannot be blamed for all the ailments plaguing Yemeni banks.
Without swift and decisive action by the CBY to enforce
banking regulations, Watani's collapse could mark the
beginning of a broader crisis.
Krajeski