US embassy cable - 05SANAA1361

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