US embassy cable - 05SANAA73

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 
-------------------- 
 
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 
------------------------------------ 
 
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 
-------------------------- 
 
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 
------------------------- 
 
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