ACRI-MENA ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010

8/3/2019 ACRI-MENA ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010

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AN ASSESSMENT OF

THE STATUS OF THE

NATIONAL CREDIT

REPORTING SYSTEM

IN YEMEN

July 2010

ARAB CREDIT REPORTING

INITIATIVE: GREEN BOOK


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GREEN BOOK - an assessment of the credit reporting system in Yemen July 2010

ACRI |A joint effort by the Arab Monetary Fund and the International Finance Corporation Page 2

ACRONYMS AND ABBREVIATIONS

ACRI Arab Credit Reporting Initiative

AMF Arab Monetary Fund

ATM Automated Teller Machine

CACB Cooperative and Agricultural Credit Bank

CBY Central Bank of Yemen

COC Code of Conduct

CPI Consumer Price Index

CRWG Credit Reporting Working Group

CSO Central Statistical Organization

GDP Gross Domestic Product

GCBP Global Credit Bureau Program

IFC International Finance Corporation

MENA Middle East and North Africa

MFI Microfinance Institution

MOF Ministry of Finance

MOI Ministry of Interiors

MSME Micro, Small and Medium Enterprise

NBFI Non Banking Financial Institution

NID National Identification

NPL Non Performing Loans

NMFF National Microfinance Foundation

PAR Portfolio at Risk

PCB Private Credit Bureau

PCR Public Credit Registry

PE Public Enterprise

POS Point of Sale

PPSC Post and Postal Savings Corporation

SFD Social Fund for Development

SME Small Medium Enterprise

WB World Bank

YBA Yemen Bankers Association

YER Yemeni Riyal


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FOREWORD

Credit information sharing is essential to facilitate financial markets intermediation and to broaden the

depth and breadth of financial service offerings. Sharing the credit history of potential individual and

business borrowers allows lenders to determine borrower creditworthiness and decrease transactioncosts associated with lending. This information exchange also facilitates lenders outreach to underserved

populations, who in the absence of credit information sharing may be marginalized - either due to the

excessively high costs of determining their creditworthiness, or as a result of the impossibility to offer solid

guarantees.

Within this context, International Finance Corporation (IFC) and the Arab Monetary Fund (AMF) have

established the Arab Credit Reporting Initiative (ACRI) aimed at promoting the development of credit

information sharing in the Middle East and North Africa (MENA) region. ACRI leverages IFCs global

expertise in developing credit information services1 and AMFs regional network of financial market

regulators to:

i) assess the credit information infrastructure in select MENA markets,

ii) promote reforms that support best practice credit information sharing,

iii) raise awareness about the importance of credit information sharing, and

iv) support regulators, government bodies and financial institutions within MENA region to

establish/enhance credit reporting systems.

ACRI undertakes a number of activities, including confidential in-depth credit market assessments, which

are presented to financial market regulators while non-confidential overviews which are made public to

facilitate exchange of information and ideas, and annual conferences focusing on issues of particular

interest in the credit reporting field. With a similar goal of sharing knowledge, ACRI has established a

knowledge portal (www.acri-mena.org) to share its results and other relevant information pertaining to

credit information sharing.

This report on Yemen is the second in a series of credit market assessments. It has been prepared by

ACRI specialists with thanks to the Central Bank of Yemen, the lending community and several

governmental agencies for their incessant support and cooperation. More information about IFC is

available onhttp://www.ifc.org, while information about AMF is available onhttp://www.amf.org.ae.

Oscar Madeddu Mohammed Taha Rafi Hafid Oubrik

Credit Bureau and RiskManagement Advisor

International Finance Corporation

MENA Credit Bureau ProgramInternational Finance Corporation

Payment Systems SpecialistArab Monetary Fund

1 IFC has extensive experience developing credit information systems in emerging markets. Since 2001, IFCs Global Credit BureauProgram has helped create and/or significantly improve 13 credit bureaus, contributed to drafting credit information laws in 21countries, and organized over 100 credit information sharing outreach events in 40 countries. IFC, jointly with the World Bank,surveys the status of information sharing in 183 countries with the annual Doing Business report.
http://www.ifc.org/http://www.ifc.org/http://www.ifc.org/http://www.amf.org.ae/http://www.amf.org.ae/http://www.amf.org.ae/http://www.amf.org.ae/http://www.ifc.org/


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CONTENTS

1. MACROECONOMICS AND DEMOGRAPHICS ................................................. 6

1.1 COUNTRY PROFILE AND ECONOMIC OVERVIEW................................................ 6

1.2. DEMOGRAPHICS AND POPULATION TRENDS ..................................................... 72. STATUS OF CREDIT AND FINANCIAL MARKETS ...................................... 9

2.1 ACCESS TO FINANCE.................................................................................................... 92.2 MARKET PLAYERS....................................................................................................... 132.2.1 BANKS ........................................................................................................................................ 13

2.2.2 MICROFINANCE INSTITUTIONS .......................................................................................... 15

2.2.3 MOBILE TELEPHONE COMPANIES .................................................................................... 18

2.2.4 OTHER LENDING INSTITUTIONS ........................................................................................ 18

2.2.5 THE CENTRAL BANK OF YEMEN ........................................................................................ 19

2.3 CREDIT RISK MANAGEMENT & CREDIT ACCESS CONSTRAINTS................ 20

2.3.1 COLLATERAL, NON PERFORMING LOANS, REJECTION RATES............................... 20

2.3.1.1 COLLATERAL AND GUARANTEES.................................................................................. 20

2.3.1.2 NON PERFORMING LOANS............................................................................................... 21

2.3.1.3 REJECTION RATES ............................................................................................................. 22

2.3.2 CREDIT UNDERWRITING & PORTFOLIO MANAGEMENT TECHNIQUES ... 233. STATUS OF CREDIT REPORTING IN YEMEN ............................................. 25

3.1 OVERVIEW ...................................................................................................................... 253.2 PRIVATE INFORMATION PROVIDERS..................................................................... 263.3 THE PUBLIC CREDIT REGISTRY OF THE CBY ..................................................... 273.4 UPGRADING THE PUBLIC CREDIT REGISTRY OF THE CBY ........................... 323.5. PUBLIC INFORMATION SOURCES.......................................................................... 383.6. OTHER STAKEHOLDERS .......................................................................................... 383.6.1. MINISTRY OF FINANCE ........................................................................................................ 38

3.6.2 MINISTRY OF INTERIOR........................................................................................................ 38

3.6.3 YEMEN BANKERS ASSOCIATION....................................................................................... 39

3.6.4 SOCIAL FUND FOR DEVELOPMENT .................................................................................. 39

3.6.5 POST OFFICE COMPANY...................................................................................................... 40

3.6.6 MONEYCHANGERS ................................................................................................................ 41

3.6.7 PENSION FUNDS..................................................................................................................... 41

3.6.8 LEASING COMPANIES ........................................................................................................... 41

3.6.9 COLLATERAL REGISTRY...................................................................................................... 42

3.6.10. STOCK EXCHANGE ............................................................................................................. 42

4. STATUS OF LEGAL FRAMEWORK ................................................................... 43

4.1. CREDIT REPORTING LEGAL FRAMEWORK GUIDELINES ............................... 434.1.1 SUPERVISION .......................................................................................................................... 43

4.1.2 LICENSING ................................................................................................................................ 43

4.1.3 HOW TO DEAL WITH BANK SECRECY .............................................................................. 44


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4.2 LEGISLATION IMPACTING CREDIT REPORTING IN YEMEN ............................ 454.3 BORROWERS CONSENT ........................................................................................... 504.4 NATIONAL IDENTIFICATION NUMBER ................................................................... 505. CONCLUSIONS ............................................................................................................ 51

5.1. A STRATEGY TO ENHANCE YEMENS NATIONAL CREDIT REPORTING

SYSTEM .................................................................................................................................. 515.2 COMPARING EXISTING AND IDEAL CREDIT REPORTING MODELS ............. 54

ANNEXES ............................................................................................................................. 60


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2003 2004 2005 2006 2007 2008 2009*

GDP per capita 2182 2109 2203 2276 2347 2410 2474

1900

2000

2100

2200

2300

2400

2500

2600

Figure 2: GDP per capita based on purchasing-

power-parity (US$) (*) 2009 estimated

1. MACROECONOMICS AND DEMOGRAPHICS

1.1 COUNTRY PROFILE AND ECONOMIC OVERVIEW

The effects of the recent global financial crisis on

Yemens economy have been minimal due to limited

integration with the international economy and relative

underdevelopment of the local market. In the short

term, oil remains the most important resource of the

country (approximately 90% of exports) and Yemens

economy may be influenced by the reduced demand

from oil dependent countries, as well as by the

internationally reduced prices of hydrocarbons and

derivative products.

Yemens GDP in 2008 totaled US$ 27 billion,

growing at an estimated annual rate of 4.2%2.

The sharp decrease of oil prices in 2008

negatively impacted overall GDP growth.

However, growth in non-oil sectors (9%) of

Yemens economy partially compensated for

reduced oil revenues. Similar trends persisted

in 2009 with a registered sharp decline in oilrevenues during the course of the year,

projecting a significant drop in 2009 when

annualized. The per capita GDP3

has

significantly increased (Figure 2) in the last ten

years from US$ 1,405 (1990) to an

estimated US$ 2,474 (2009).

However, due to high inflation (Figure 3),

real GDP has been negative. In 2008,

inflation has been driven by food and

commodities price increase, but according to

recently released Central Bank of Yemen

(CBY) data, the Consumer Price Index (CPI)

is expected to remain under control. The

2 Central Bank Yemen, Annual Report, 2007 and World Bank Sanaa Yemen Economic Update, Spring 20093 Index Mundi on IMF data,http://www.indexmundi.com/yemen/gdp_per_capita_(ppp).html, October 22, 2009

Figure 1: Map of Yemen

2003 2004 2005 2006 2007 2008*

GDP % 3.3 3.1 5.8 4.5 4.7 4.8

CPI% 10.8 12.5 9.8 10.9 7.9 19

0

2

4

6

810

12

14

16

18

20

Figure 3: GDP and Consumer Price Index

(*) 2008 estimate
http://www.indexmundi.com/yemen/gdp_per_capita_(ppp).htmlhttp://www.indexmundi.com/yemen/gdp_per_capita_(ppp).htmlhttp://www.indexmundi.com/yemen/gdp_per_capita_(ppp).htmlhttp://www.indexmundi.com/yemen/gdp_per_capita_(ppp).html


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280

300

320

340

360

380

400

420440

460

Year AvgMonthly

2004 2005 2006 2007 2008

Figure 4: Yemen Crude Oil Production (bbls/day)

cumulative inflation from December 2008 to July 2009 was only 1.9%, while on a yearly basis the average

inflation reached 4.4%.

The most likely impact of the global financial

crisis will be reduced foreign direct investments

and limited inward remittances, representing a

vital flow of revenue estimated at 5%-6% of the

GDP. World Bank analysis4

of the EIA (Energy

Information Administration) data shows

Yemens declining oil output with production

peaking in 2004-5 (Figure 4).

Yemen will continue pursuing integration with

regional economies by pursuing efforts to join GCC while pushing through a series of structural reforms

started in the past few years. Reforms will include land registration, land transportation, nationalidentification, electricity, social insurance, anti-money laundering, income tax, investment, and

telecommunications. Furthermore, the Government is seeking to implement a strategy to modernize the

country by diversification of exports beyond oil.

1.2. DEMOGRAPHICS AND POPULATION TRENDS

The countrys population, with an annual growth rate of 3.4%5, is expected to triple by 2050 to 58 million

6

(Figures 5 and 6). Yemens young population (almost 50% are under 15 years) is undergoing rapid

urbanization. Over 70% of the population currently lives in rural areas.

Figure 5: Population Pyramid 2010 Figure 6: Population Pyramid 2050

However, major cities, such as Sanaa are expected to double the number of inhabitants within the next

15 years (Table 1).

4The World Bank Sanaa, Yemen Economic Update, Spring 2009

5 Index Mundi, Yemen Demographic Profile, http://www.indexmundi.com/yemen/demographics_profile.html,20096 Population Reference Bureau,http://www.prb.org/Countries/Yemen.aspx#,October 21, 2009
http://www.indexmundi.com/yemen/demographics_profile.htmlhttp://www.indexmundi.com/yemen/demographics_profile.htmlhttp://www.prb.org/Countries/Yemen.aspxhttp://www.prb.org/Countries/Yemen.aspxhttp://www.prb.org/Countries/Yemen.aspxhttp://www.indexmundi.com/yemen/demographics_profile.html


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(in thousands)

The literacy rate (able to read and write) for the adult (over 15 years) population is roughly 50% -

comprised of nearly 71% males (Table 2). In 2006/2007 the number of students enrolled in the school

system totaled 4.85 million, of which 41% were girls.

(in thousands)

Table 2: Number of Students at various stages of Education 8

Stage2005/2006 2006/2007

Male Female Total Male Female Total

Basic Education 2,364 1,608 3,972 2,496 1,774 4,270

Secondary Education 353 173 526 366 195 581

Total 2,717 1,781 4,498 2,882 1,969 4,851

The formal economy in Yemen is characterized by a ballooned public sector administration, representing

the largest employer, and a private sector dominated by a limited number of private companies.

Unemployment rates are nearing 35% in 2007. The work force of Yemen is mainly employed in

agriculture (54%) and herding. Services, construction, industry, and commerce, account for less than

25% of the work force. The number of Yemeni nationals working abroad in 2005 was estimated at 2.8%

of the population. During the last 8 years, the inflow of remittances has averaged USD 1.29 billion

(roughly 6.1% of GDP) - if outflow remittances are also considered. However, the volume of remittances

is expected to decrease in 2010 due to the global financial crisis.

With population growth, the expected increase of the work force will have considerable repercussions on

the job market, new housing stock and the increased demand for durable and semi-durable consumer

goods (cars, furniture, appliances, and technology). This will create opportunities for the credit industry

requiring a shift in focus from business needs typically restricted to large business groups, to individual

credit needs.

Increased access to credit has played an evident role in improving the quality of life of a majority of the Yemeni

populace. Broader, steadier and easier credit flows can represent the only exit strategy for the poorest and largest

segment of the population, helping to create micro and small enterprises that can be the backbone of the economy.

7Population Division, Department of Economic and Social Affairs, United Nations Secretariat, World Population Prospects, Ed.2006,and World Urbanization Prospects, Ed 2007,http://esa.un.org/unup, October 21, 2009.8 Ministry of Education Data.

Table 1: Population of urban agglomerations 2005-2025

City 2005 2007 2010 2015 2020 2025

Al Hudaydah 672 780 951 1232 1528 1854

Sanaa 1801 2008 2345 2955 3636 4382

Taizz 657 751 902 1159 1437 1743
http://esa.un.org/unuphttp://esa.un.org/unuphttp://esa.un.org/unuphttp://esa.un.org/unup


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BOX1: YEMEN CREDIT & FINANCIAL MARKETS SNAPSHOT

Population: 23 to 24 million.

Bank clients with an account: less than 5% of population.

Loan clients: less than 1% of population (November 2009, CBY).

Operative banks: 18 including private, public, and Islamic.

Banks network: 215 branches (2007) and 238 ATMs.

CBY branches: 22.

Ratio branches/population: approximately 1 for every 107,000 people.

Total credit outstanding: YER 912 billion (August 2009).

Total banks credit outstanding: YER 910 billion (August 2009).

Total MFIs credit outstanding: YER 2 billion (March 2009).

Bank credit to private sector: 45% of total outstanding.

Bank loan interest rates: generally between 15% - 20%.

Money changers: 521 licensed (2007).

MFIs: 13 Social Fund for Development associates, including NGOS - allunregulated.

MFI banks: 2 (Al-Amal and Tadhamon) both regulated by CBY.

MFI loan customers: 38,091 (March 2009).

MFI depositors: 30,430 (March 2009).

MFI total loans disbursed since inception: 253,650.

MFI volumes disbursed since inception: YER 12,2 billion.

MFI P.A.R.: from 0.1% to 16.7%.

MFIs client profile: mostly women (up to 100% in some MFIs).

MFIs average loan: US$ 200.

NBFI, Retailers and retail credit: none.

Debit cards: new, negligible utilization at ATM.

P.O.S: negligible presence, network creation in progress.

Credit cards: virtually absent. Underwriting procedures: extremely traditional.

Collateral: always requested.

Scoring: absent or sporadic and internally built.

2. STATUS OF CREDIT AND FINANCIAL MARKETS

2.1 ACCESS TO FINANCE

The size of the credit market in Yemenis still very modest and financial service

penetration rate is extremely low.

According to World Bank analysis9, the

number of people with a formal,

financial institution relationship neared

800,000 in 2008 (approximately 4% of

the population), with a penetration of 35

depositors for every 1,000 people.

Saving accounts and deposits are the

most popular products, while credit,

which is dominated by the banking

sector, remains at a relatively nascent

stage of development. Access to

finance is difficult, limited, cumbersome

and negligible - particularly for the low

income workers, Micro and Small

Medium Enterprises (which mainly

compose the informal strata of the

economy), as well as for individualconsumers, principally those from the

non-salaried category.

Currently, the total number of borrowers being

served by Yemens banking sector is only 129,905

customers (individuals and firms)10

- roughly 0.6% of

the population. The outstanding loan-to-GDP ratio is

8%. This is not only due to highly selective lending

practices by banks, but also due to a focus on

lending to corporate and high net worth individuals.

The credit market is highly concentrated, liquid, and

traditional.

9Social and Economic Development Group MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed ActionPlan, 200810 Central Bank of Yemen, Presentation at the ACRI workshop, Abu Dhabi, November 9, 2009

1%14%

7%

42%

22%

14%

Agric ulture and Fishing

Industry

Construction

Trade

Others

Classified Loans

Figure 7: Credit distribution by sector (2007)


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Banks are well positioned to significantly expand credit and play a greater role in Yemens economy.

Often, banks in Yemen are not able to effectively play the intermediation role. Yemeni banks funds are

structured as follows:

- 70% to finance the Government,

- 20% for intermediation, and

- 10% placed with foreign correspondents banks.11

The overall loans/deposit ratio is 33%12

, which is significantly higher than the regional average and

severely limits access to finance. Banks network coverage is largely insufficient and when compared with

similar countries, shows one of the lowest ratios in the MENA region (Figure 8), both in terms of territorial

and population coverage.

Figure 8: Bank Branches13

Deposits have been increasing in the last fiveyears at a compounded rate of approximately

15%, reaching the amount of YER 1,275 billion

(USD 6.25 billion) as of August 2009. Foreign

currency deposits represent over 41% of the total

deposits14

, with time deposits (32%) coming

second in client preferences.

As of October 2009, 18 banks (4 public and 14

private of which 4 are Islamic banks and 5 are

foreign branches) were operating in Yemen

under the supervision of CBY.

11Social and Economic Development Group MENAs Financial Sector Review Yemen Financial Sector Reform: a Proposed Action

Plan, 200812 Central Bank of Yemen, Presentation at the ACRI workshop, Abu Dhabi, November 9, 200913 World Bank. Finance for All comparator countries are Albania, Bolivia, Ethiopia, Ghana, Honduras, Kenya, Tanzania, Uganda andZambia. Bangladesh and Pakistan have much more developed financial systems, nearly five times as many bank branches, and arenot factored in this figure.14 Central Bank of Yemen, Annual Report, 2007.

Figure 9: Bank Deposits (YER millions)

2005 2006 2007 Aug-08 Aug-09

Deposits 637,958 851,044 1,050,932 1,159,706 1,275,100

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000


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Microfinance institutions (MFI) represent the

only alternative channel of finance available.

They are generally associated with the

Social Fund for Development (SFD), and are

not regulated by CBY. Al-Amal and

Tadhamon are two commercial banks which

are an exception to this rule, and are

operating in the microfinance sector under

CBY regulation.

Table 3: Number of Financial Establishments and

Corporations: 2002 to 2006

Unsecured credit

is not common

among banks.

There remains a

heavy reliance on

collateral to

secure credit

transactions for

large corporate

borrowers as well

as for individuals.

MFIs have also

adopted thepractice of

requiring a

guarantee to grant

lines of credits.

This has been extended to service providers such as mobile telephone operators who require 100% cash

collateral for post-paid contracts15

.

Despite high collateralization, the absence of strong creditors rights and a weak legal framework result in

lenders, often facing delays, in enforcing collateral. This makes credit more risky and expensive for

lenders and borrowers. Furthermore, access to finance remains limited by the absence of advanced risk

management tools, lack of complete and reliable credit information, ubiquitous financial documentation

requirements burdened with bureaucratic procedures and a long decision-making process.World Bank

analysis16

has shown that almost 83% of firms in Yemen claim to have never received a bank loan, and

15 Field interview with MTN, October 6, 2009.16 Social and Economic Development Group, MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action

Plan, 2008 and Investment Climate Assessment, 2006

Year

Item

1818181717Banks11

11111The Central Bank1-1 1-1

1111111010Commercial banks1-2 1-2

44444Islamic banks1-3 1-3

22222Specialized banks1-4 1-4

299341349410463Exchange22

710141417Exchange companies2-1 2-1

292331335396446Exchange offices2-2 2-2

1515161616 3Insurance Corporations &

Pension funds3

1111121212Insurance Corporations3-1 3-1

44444Pension and annuity funds3-2 3-2

332374383443496

2006-2002

Number of Financial Establishments and Corporations: 2002 to 2006

20052006*

*

200220032004

(1) Central Bank of Yeme n for data on banks and exchange companies, se veral

* Preliminary data

Total

S

(2) Ministry of Industry & Commerce for Insurance Companies

(3) Ministry of Finance for Pension and annuity funds

Sources of data:

) )1 ) )2

) )3

:

Gov er nm ent Dem and T im e Saving sForeign

CurrencyEarmarked Total

Deposits 333 149,523 415,379 116,399 534,206 59,260 1275100

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Figure 10: Deposit by type (YER millions Aug. 2009)


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among medium enterprises only 28.9% have ever used a bank. Another major constraint raised by 47%

of large firms and 32% of small firms is the high cost of credit.

The financial landscape in

Yemen remains limited to

traditional financial products, and

cash constitutes the most

common method of payment for

business and personal

transactions alike. Indicative of

this is the number of checks

cleared on a monthly basis by

CBY (Figure 11). This number,

while increasing gradually, still

remains low. During July andAugust 2009, the CBY processed

approximately 63,000 checks

each month17

. Checking

accounts and debit cards though

present are generally utilized by

a minority of the population - in most cases, the wealthy.

Leasing has been recently introduced, though it will require legislation and better financial infrastructure

(such as a fully functioning credit registry, collateral registry, leased property registry, etc.) for broader

acceptance to take place.

As mentioned, while credit penetration remains low, banks are starting to include SME and consumer

market segments to capitalize on credit potential and economic opportunities. A more inclusive and

healthier credit growth can be achieved based on borrower demand, competition among lenders and

through greater financial literacy of the borrowing public.

International experience has shown that as the credit market develops, other non-regulated commercial

entities will start granting credit, for e.g. retailers, mobile telephone companies, etc. It can also reasonably

be expected that consumer, SME and micro credit segments will drive growth and profitability of the credit

industry through higher volumes and value of loans granted. However, such growth will depend on

availability of complete and comprehensive credit history and adoption of automated risk management

tools (e.g. credit scoring) by financial institutions. The regulatory role of CBY will also be crucial in

encouraging the development of a solid and healthy credit market.

17 Central Bank of Yemen, Review of Monetary and Banking Developments, August 2009

Figure 11: Clearing Room


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2.2 MARKET PLAYERS

2.2.1 BANKS

The banking system of Yemen is comprised of 16 commercial banks and 2 special development banks

(Housing Bank and Yemen Bank for Reconstruction and Development). Four banks are state owned, the

rest are either foreign bank branches (five) or owned by local private shareholders (nine). The penetrationand the market share of Islamic banks are growing, and some banks (e.g. Tadhamon, Saba and the

Islamic Bank of Yemen for Finance and Investment IBYFI) are increasingly active in this credit sector. Al

Amal (established in 2009) and Tadhamon are operating in the microfinance sector, with the former

completely dedicated to microfinance and providing Islamic micro credit loans. All the eighteen banks are

licensed and supervised by CBY.

Table 4: List of Yemeni Banks as of October 2009

S.No. Particulars

1 Al-Amal Bank

2 Arab Bank

3 Calyon Credit Agricole

4 Cooperative & Agriculture Credit Bank

5 Housing Bank

6 Islamic Bank of Yemen for Finance and Investment

7 International Bank of Yemen

8 National Bank of Yemen

9 Qatar National Bank

10 Rafidan Bank

11 Saba Islamic Bank

12 Shamil Bank of Yemen and Bahrain

13 Tadhamon International Islamic Bank

14 The Yemen Bank of Reconstruction and Development

15 United Bank Ltd

16 Yemen Commercial Bank

17 Yemen Gulf Bank

18 Yemen Kuwait Bank for Trade and Investment

In order to boost and support the growth of the economy and in the absence of strong private sector

banks, the government set-up 3 development banks, each one focusing on a specific economic sector:1. The Yemen Bank for Reconstruction and Development, founded in 1962, with the aim to promote

industrial development and offering products like credit guarantees and industrial loans.

2. The Housing Credit Bank, created in 1977, with the purpose of offering mortgage loans to both

private individuals and firms operating in the construction sector.

3. The Cooperative and Agricultural Credit Bank (CACB), established in 1982, with the original goal

to support farming and fishing activities in acquiring equipment and offering traditional loans as well.


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The CACB has been recently restructured, as part of the reform process undertaken by the

government, to concentrate on the retail credit sector.

The banking industry as a whole remains small

and at an early stage of sophistication, with

assets representing approximately 30% of GDP18.

Banks credit volumes were YER 909.9 billion

(USD 4.46 billion), or 99.8% of total credit

outstanding as of August 2009. Private credit

represents nearly 45% of total credit in 2009,

down from 59% in 2008. Government borrowings

have absorbed 53% of banking sector credit in

2009, against 39% during the same period in

2008.

Yemens bank network is severely under

branched. The banking sectors branch network is

comprised of 228 branches19

with the highest

concentration in Sanaa20. In Yemen, 100,000

customers are serviced per branch, while in

developing countries the same number of

customers is serviced by 8-9 branches (11.6 in

Morocco, 29.8 in Lebanon)21

. The three major

public banks (Figure 13) represent the majority of

the network (53%).

A simpler regulation could facilitate branch

openings, and thereby increase branch network coverage.

Research22

has shown that requirements for branch

approval are detrimental as they correspond to a

lower branch penetration (Figure 14).

CBY maintains a separate network of 22 branches

which play an institutional role and do not offer

commercial financial services to the general

population.

18Social and Economic Development Group, MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action

Plan, 200819 Central Bank of Yemen, November, 200920 Central Bank of Yemen, Annual Report, 200721 CGAP, Financial Access,http://www.cgap.org/financialindicators,200922 CGAP, Financial Access,http://www.cgap.org/financialindicators,2009

40

29

10

3

2511

8

46

1

13

521

12

0

6

2 1

YRD NBY ABL UBL HCB CALYON

IBY YKB CACB RB YCB IBD

TIIB SIB WB SBYB W BYGB QNB

Figure 13: Banks Branch Network as of end of 2007

Figure 14: Branches per square kilometer

Figure 12: Outstanding bank loans and advances

2005 2006 2007 Aug-08 Aug-09

to governemnt 180,205 202,693 289,342 287,798 484,789

to public client 43 3,062 7,072 9,110 16,066

to private 225,783 266,118 359,477 431,353 409,056

Total 406,031 471,873 655,891 728,261 909,911

0

100,000

200,000

300,000

400,000

500,000600,000

700,000

800,000

900,0001,000,000
http://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicatorshttp://www.cgap.org/financialindicators


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The ATM network remains extremely limited

despite a 46% growth since 200723

(Figure

15). One ATM services 96,600 people. This

remains considerably low if compared with

other emerging markets with an average of 23

ATM machines for 100,000 people.24

Credit cards are still rare, mainly utilized

abroad and scarcely accepted by the

commercial network in Yemen.

2.2.2 MICROFINANCE INSTITUTIONS

Microfinance institutions represent the only alternative

credit channel to the banking system. Microfinance credit

volumes compared to banks outstanding are only 0.2%

(YER 1.98 billion as of March 2009). The sector is gainingimportance in Yemen, and since the start of microfinance

operations, it has cumulatively disbursed credit of YER

12,759 billion25

(USD 62.54 billion).

13 MFIs are associated with SFD and 11 are fully

operational in Yemen. Most institutions operate in the

capital city of Sanaa; some have a larger network comprising branches in rural areas. Women represent

the vast majority of loan customers and in the case of

some MFIs represent 100% of the portfolio, for example,

in the case of Abyan S&C and Al-Awael MF Company.

Since inception of the microfinance sector, MFIs have

disbursed over 253,000 micro loans. This represents the

importance of MFIs, and makes these institutions a vital

finance channel, particularly for the vast sector of active,

non-bankableborrowers, that is the informal economy. It

is noteworthy, that in the case of Yemen, this comprises

most of the active population26

. As of March 2009, the

number of active micro loans in the MFIs books totaled

38,091, of which 45% were concentrated in the two larger

MFIs (National Micro Finance Foundation-NMFF with

12,132 loans and MF Development Program-Nama- with 5,005) as indicated in Figure 17. It is estimated

that another 5,000 micro loans have also been granted by other NGOs, not associated with the SFD.

23 Central Bank of Yemen, Annual Report, 200724 CGAP, Financial Access,http://www.cgap.org/financialindicators,200925 Small and Micro Enterprise Development in Yemen, SFD, 200926Lenders estimate

2005 2006 2007

ATM 117 163 238

0

50

100

150

200

250

Figure 15: Automated Teller Machines

2.00

910.00

MFI BANKS

Figure 16: Total outstanding loans volume-

YER billions (August 2009)

742417

12,132

5,0053561

3500

3116

2365

2378

2118

1370 1378

Al-Amal SOFD National MFDP

Abyan Aden Al-Awael Sana'a

SFSD SMEF Al-Hudaidah Wadi

Figure 17: Total outstanding microcredit loans

(as of March 2009)
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BOX 2: BANK AL-AMAL: A NEW

OPPORTUNITY FOR MICRO-ENTREPRENEURS

Al-Amal Microfinance Bank was established by

Law (23 of 2002), as the first Microfinance Bank in

Yemen. However, operations have started only

recently in January 2009. Al- Amal is a partialundertaking of the Government of Yemen (it owns

45% of the institution through the SFD); the other

shareholders are the AGFUND (Arab Gulf

Program for United Nations Development

Organizations) with 35%, and the private sector

with 20% (Figure 18).

Al-Amals objective is to increase access to

finance for poor clients engaged in productive

activities (micro-entrepreneurs) as well as a

broader range of services (savings, insurance,

etc.) to help them in improving their businesses. A

challenging 5 year strategy has been drafted

(Figure 19) with the objective to enroll 100,000

active customers by the year 2013 and an

outstanding loan volume of US$ 56.7 million.

Since its roll-out, Al-Amal Bank has acquired 3,400

loan customers (2,700 are active) and 2,600

depositors (mainly voluntary savings). Women

represent 52% of the total active borrowers. New

branches have been recently opened and others

are in the pipeline for the next few years

Apart from individual loans, the bank grantssolidarity loans as well (ranging from US$50 to

US$ 4,000 with a current average of US$300).

Guarantees are generally requested, either the

psychological collective solidarity in case of group

loans, or personal guarantees, guarantors, or cash

collateral. Islamic microfinance products are

provided by the financial institutions. The

decisional chain is based on loan amounts with

equal involvement of branches, regions and HQ.

Al-Amal is regulated by CBY and must report

credit data to the CBYs PCR. As of October 2009,

this was not the case. Al-Amal claims a very lowPortfolio at Risk (P.A.R.) ratio (nearly 0%) which

could also be explained with its very recent start of

operations.

Source: Al-Amal Management Interview, November 2009

Table 5: Staff Loans

Particulars 2009 2010 2011 2012 2013

Staff 58 142 248 379 531

Loan Officers 22 66 128 206 298

Branches 4 10 18 28 40

Clients 4,500 15,000 40,000 70,000 100,000

Outstanding(000, US$)

550 2700 7150 14150 23,400

Disbursed

(000, US$) 1,200 6,200 16,900 33,900 56,700

20%

45%

35%

Pr ivate Sec tor Yemen Government AGFUND

Figure 18: Al-Amal Bank Shareholders

2009 2010 2011 2012 2013

Outstanding (000,US$) 550 2,700 7, 150 14,150 23,400

Disbursed (000.US$) 1,200 6,200 16,900 33,900 56,700

-

10,000

20,000

30,000

40,000

50,000

60,000

Figure 19: Al-Amal Bank 5 Year Plan (loan volumes)


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BOX 3: MICROFINANCE INSTITUTIONS AND

COLLATERAL

A common practice of the Yemeni microfinance

industry is the frequent use of collateral; guarantees

are requested for small loans. In the case of solidarity

group lending, the moral, social, psychologicalpressure serve as collateral as well - though this is a

more customary practice elsewhere. The anomalous

routine of requesting collateral for micro credit loans

(though the average loan amount is often higher in

Yemen than the ones granted in other regions) is

likely caused by a lack of reliable data. These issues

are symptoms of an underdeveloped credit risk

management system which can be improved by a

comprehensive, shared credit information database.

The positive impact of a PCB could be an important

factor for change, leading to increased access to

micro credit and stronger portfolio performance.

Yemeni MFIs fully agree on the information sharingconcept as well as need and are keen to participate in

the creation of a potential PCB.

Loans and savings are the two major product

offerings of Microfinance Banks (MFBs). Loans

can be viewed as two types: micro loans (average

US$ 150 200, up to US$ 1,000) granted to micro

enterprises with 1 to 4 employees, and small loans

(average US$ 2,500, up to US$ 20,000) granted to

small entrepreneurs that employ 5 to 50 workers.

As of March 2009, MFBs reported a depositor

base of 30,430 with almost 50% (14,856) being

customers of National Microfinance Foundation

(NMFF).

P.A.R. varies significantly across MFBs and MFIs,

ranging from 0% to 16.7% (March 2009).

Typically, the larger institutions have a bettermanaged portfolio and lower levels of risk,

although over-indebtedness is becoming a

significant issue based on an analysis of the basic

information maintained by SFD. The lack of information sharing may prevent reduced lending rates for

micro-enterprises and also lead to a more serious over-indebtedness problem compounding the P.A.R.

Microfinance operations are regulated by a law (No. 15/2009) which authorizes microfinance banks to

provide banking service to families, small businesses and smaller projects in the urban and rural sectors

of the country. The law regulates the role of the microfinance banks, defines the targeted typologies of

clients, and establishes that MFIs are to be supervised by the CBY. This implies that, among the many

modifications and upgrades that the MFBs will have to undertake, there will also be the necessity to

provide complete monthly information on loans portfolio to the CBY.

A major review and significant investments need to be undertaken by the MFIs to achieve the sectors

growth potential. Such changes will enable MFIs to participate in and contribute to the development of a

much needed information sharing infrastructure, which will support broader access to finance. Although

credit volumes of commercial banks will likely be higher, robust growth in microfinance can see the

number of MFI loan accounts; exceed those of commercial banks in a span of 3-5 years. To achieve this,

the following, are some of the major issues that will need to be addressed:

- Need of systems upgrade, automation, training of credit officers and improved service offerings.

- Comprehensive credit information sharing.

- Improved portfolio monitoring and P.A.R. control in some cases.

- Introduction of wider range of product offerings (e.g. micro-insurance).

- Removal of subsidy to MFIs and reduction of operational costs.

- Lack of standardized practices, processes and policies.

- Limited territorial coverage and high urban concentration.

- Lack of programs for borrowers financial education.


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2.2.3 MOBILE TELEPHONE COMPANIES

In the past few years, mobile connections have grown by 40%-50%. Four main operators (MTN-Spacetel

Yemen, Yemen Mobile, Sabafon, Y-Hits Unitel) are currently competing in Yemen. They have acquired

approximately 6 million customers - with MTN being the market leader, with its portfolio of roughly 2.7

million customers, as of October 2009. Market penetration remains low, and according to different

sources, it varies from 24%27

to 30%28

. According to industry growth estimates, it is expected that the

number of customers will reach 10 million active users in the next 3 years. The average air-time

consumption per contract is USD 7 per month29

. This is much lower than other comparable countries, for

e.g., in Cape Verde, the air-time per capita consumption is roughly USD 20 per month. Air time prices

remain high, and services are limited to basic ones.

The mobile telecom market in Yemen is a business characterized by elevated advanced cash flows, and

negligible credit risk for the providers. It is estimated that up to 90% of mobile subscribers in Yemen have

opted for prepaid contracts. Mobile post-paid contracts, those that have greater relevance to credit

behavior, account for approximately 600,000 - 750,000, which is 10% to 15% of the total subscriber base.

This customer portfolio represents the largest customer base in the commercial banking or MFI sectors.

One of the limitations in further expansion of post-paid contracts is the cash-collateral; typically an

amount corresponding to the credit limit requested by each new applicant. In case of corporate and

business firms (which represent 40% of total prepaid contracts while the remaining 60% are individuals),

a bank letter of guarantee is also accepted. Higher limits are automatically authorized based on good

payment performance and airtime utilization by the customer. However, each limit increase must be

supported by an additional guarantee. Best customers are sometimes authorized to exceed the credit

limit; however this is an exception rather than the rule.

Currently there is no formal or informal exchange of information, nor a collective blacklist being

maintained by the four operators in Yemen. Mobile telephone contract applications do not include the

consumers consent to share data with third parties. Identification is always required with new contracts,

although it is not always the new national ID number, instead, a personal identification, passport, or

student card is also accepted.

2.2.4 OTHER LENDING INSTITUTIONS

Presently, no other commercial lenders are operating in Yemen, such as retailers, supermarkets, NBFI,

NGOs. There is no stock exchange in Yemen and the money market remains limited to issuance andnegotiation of treasury bills. Money changers have a well developed network across Yemen with their

operations licensed by CBY, although they are not allowed to distribute financial services such as loans. If

efforts are made to develop alternate lending sources, such as retailers, the following benefits may

accrue:

27 MTN estimates, October 4, 200928 Market Research.Com,http://www.marketresearch.com/product/display.asp?productid=2384211, October, 200929 Market Research.Com,http://www.marketresearch.com/product/display.asp?productid=2384211, October, 2009
http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211http://www.marketresearch.com/product/display.asp?productid=2384211


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i) banks may acquire new customers, increase their portfolio volumes, limit their acquisition costs, and

strongly increase cross-selling opportunities;

ii) retailers would dramatically increase sales without maintaining high levels of working capital,

immobilized in their outlets, generating a faster sales rotation;

iii) Consumers could avoid the wait to purchase durable and semi-durable goods, until accumulating

savings over long periods.

Local retailers neither have the size, the organization, or any immediate plans to enter directly into the

credit market. They remain focused on their primary sales activity, while the Yemeni population continues

a high dependence on cash for trade transactions.

2.2.5 THE CENTRAL BANK OF YEMEN

CBY was established in 1971 as an independent authority to regulate financial and credit markets in

Yemen. In 1990, after the unification of South and North Yemen, the CBY was merged with the Bank of

Yemen as the sole regulator for the banking sector. Law 14 of 2000 establishes CBY as an independent

body, created to carry out all the functions of a normal central bank with the paramount objectives of

conducting monetary policy to keep inflation under control, stabilize the exchange rate of the national

currency and promote investment and economic growth. It is entrusted to a Board of Directors, headed by

a Governor. The headquarters of the CBY are in Sanaa while branches are operational in each of the

twenty Governorates of the country.

The missions and main objectives are summarized as follows:30

1. Monetary Policy - The CBY uses all the tools of monetary policy at its disposal to keep inflation undercontrol, stabilize the exchange rate of the national currency and create an environment that is

conducive to investment and high growth. Among the main monetary tools used by the CBY are the

interest rate, the discount rate, the reserve requirements, foreign exchange markets interventions,

and issuing of certificates of deposits.

2. Bank Supervision - The CBY supervises the banking system with a view to promoting its sound

functioning and protecting the interests of depositors and shareholders.

3. National Currency - The CBY is the governmental agency which issues the countrys currency (YER).

The exchange rate of the Yemeni Riyal has been floating freely since 1 July 1996, and there has

been only one single exchange rate since then.

4. Management of the Official Reserves - The CBY keeps the countrys foreign reserves, investing and

managing them in the best interests of the national economy. The official reserves have risen from

2.8 months of import cover in 1994, to 15 months in 2004. The commercial banks are free to deal in

the foreign exchange market and are allowed to keep balances in foreign currencies for their account

30 Central Bank of Yemen, http://www.centralbank.gov.ye/


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at home and abroad. There are no restrictions on the transfer of foreign currencies abroad, as the

Republic of Yemen has accepted Article VIII of the International Monetary Fund in December 1996.

5. Bankers Bank - The Central Bank of Yemen maintains accounts for the commercial banks and acts

as a clearing house for their transactions. The commercial banks keep statutory reserves with the

Central Bank as a ratio of their deposits. This ratio varies from time to time in accordance with the

condition and state of the economy. It is one of the monetary tools at the disposal of the Central

Bank.

6. Governments Banker - Besides maintaining accounts for the various Government ministries and

agencies, the CBY also keeps accounts in the name of international institutions, from which it makes

payment orders to the concerned parties as instructed. Furthermore, the CBY manages the issue and

redemption of treasury bills.

7. Other ancillary functions:

- CBY acts as lender of last resort.

- CBY administers and manages the external public debt of the country.

- CBY acts as advisor to the Government.- CBY implements economic and financial policies.

- CBY publishes financial and economic data and reports on a regular basis, reflecting the health of

the domestic economy.

2.3 CREDIT RISK MANAGEMENT & CREDIT ACCESS CONSTRAINTS

2.3.1 COLLATERAL, NON PERFORMING LOANS, REJECTION RATES

2.3.1.1 COLLATERAL AND GUARANTEES

Among the limiting factors to a faster expansion of credit is the ubiquitous requirement of collateral andguarantees which make the Yemeni credit system highly selective and expensive. All credit lines and

loans granted are backed-up by the applicant either with physical/real collateral or with personal

guarantees, through a co-guarantor/s, using cash collateral or guarantee deposits.

Even salary may be a collateral surrogate and a pre-requisite to obtain credit. A steady salary or a

certified income is the basic condition to be considered eligible for a loan. However, this leads to

entrepreneurs (typically from the informal sector) being cut-out from the traditional credit channels. Even

microfinance institutions often request guarantees for micro loans. An example of how guarantees

influence access to credit is indicated in the table below, which has been extrapolated from responses to

the business/risk questionnaires supplied by the banks to IFC31

.

31 The name of the bank is not mentioned here for confidentiality reasons. The products not ticked are not available at the bank.


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BOX 4: REPUTATIONAL COLLATERAL VS.

COLLATERAL

Borrowers, particularly the most vulnerable segments

(individual borrowers, micro- entrepreneurs and the informal

sector), are often unable to provide guarantees. With a lack

of comprehensive and reliable credit information, lenders are

unable to distinguish good from bad customers. In turn, they

adopt two options to protect their portfolio: either increase

disproportionately the interest rate applied, or more

frequently, reject an applicant rather than take a potential

risk. Reputational collateral allows a significant diminution

of collateral requirements and helps to improve access to

credit. It is generated by the historical payment performance,

i.e. credit history data, both positive and negative, especially

at the consumers level. Accessing this data about all

borrowers is reliable, free and easy and it is much more

effective than real collateral for small ticket loans.

Table 6: Credit Products

TYPE OF CREDITPRODUCT

COLLATERALREQUIRED(YES/NO)

% OF CREDITACCOUNTS FOR WHICH

COLLATERAL ISREQUIRED

OTHER TYPE OFGUARANTEE,IF REQUIRED

(SPECIFY TYPE)

NOTES/EXPLANATIONS

CREDIT CARDS - - -PERSONAL LOANS YES 100% SALARY

CAR LOANS YES 100% SALARY INSURANCE

MORTGAGES YES 100% SALARY

OVERDRAFT YES 100%ACCOUNT

RECEIVABLE

MICROCREDITLOANS

- - -

SME LOANS - - -

OTHERS (SPECIFY) - - -

Guarantees/collateral requirement seems to

be the foundation of all credit policies in

Yemen, and the most common risk

protection and exit strategy for the banks. It

is certainly a major factor holding up a full

credit democratization, and one of the key

areas for improvement in the current credit

granting procedures. This issue can best be

addressed by the establishment of a fullcredit information sharing system and

through the dissemination of complete credit

histories among lenders.

2.3.1.2 NON PERFORMING LOANS

No official and definitive Non Performing

Loans (NPL) ratios are available for the first 6 months of 2009. However, banks have cited NPL ratios

ranging from 1% to 12%, across various sectors and customer segments, with higher peaks discovered

with overdrafts and business loans. CBY records32 (2004-2007) show bad loans decreasing in the past

years and portfolio quality has improved, NPLs levels can be reduced through better risk management.

NPLs dropped from 17.28% in 2006 to 13.86% in 2007 (Table 7) with high levels of risk associated with

public enterprises.

32 Social and Economic Development Group, MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed ActionPlan, 2008.


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In millions YER

Table 7: Loan Portfolio Quality of Commercial Banks in Yemen (2004-07)

CLASSIFICATION 2004 2005 2006 2007

Performing 151,680.4 186,073.2 217,545.5 309,857.3

Substandard 4,030.0 3,501.7 6,540.9 15,276.4

Doubtful 3,539.1 3,677.5 7,313.5 6,899.8

Loss 24,361.8 29,439.0 31,602.5 27,661.0

Gross loans & advances 183,611.3 222,691.4 263,002.4 359,694.5

Nonperforming loans 31,930.9 36,618.2 45,456.9 49,837.2

RATIOS (%)

NPL ratio 17.39 16.44 17.28 13.86

Coverage ratio 84.24 81.99 75.15 59.54

Open loan exposure ratio 13.51 13.06 15.86 23.32Source: Supervision Department, Central Bank of Yemen.

Banks have recently started consumer lending, therefore the historical data of the associated portfolios is

too limited to conduct meaningful analysis of NPLs in consumer loans. Loans granted in the absence of

reliable credit information sharing among lenders and, consequently, more advanced underwriting tools,

will require close monitoring. As for microfinance institutions, their P.A.R. ranges from 0% to 16.7% as of

March 2009.

2.3.1.3 REJECTION RATESThe following are the general observations about rejection rates of credit applicants:

i. Rejections rates range from 7%-21%, with the highest percentage in those banks which are

aggressively pursuing an increased market share in retail credit33

. However, this percentage is related

to those applications that are selected for assessment by the credit committee.

ii. Rejection rates for applications that do not reach any decision stage but are discarded before being

officially filed and completed is higher, though unknown and unrecorded.

iii. The extremely low credit penetration among the population is indicative of selective credit

applications being raised for approval, as well as the low motivation of potential borrowers to file a

credit application.

The main reasons for rejection cited by banks in response to the IFC survey are: i) lack of information, ii)

insufficient income, iii) bad references. Insufficient income ranges from 40-80% as the major cause of

rejection (Table 8)34

. The absence of reliable and comprehensive credit information is the second reason

33 Questionnaires supplied by Yemeni banks to IFC, October 2009.34 Questionnaires supplied by Yemeni banks to IFC, October 2009.


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for rejection. Rejection rates and biased subjective judgments can be significantly reduced through the

availability and utilization of credit information and advanced credit tools (e.g. credit scoring).

Table 8: Rejection Reasons

Particulars Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8

No information 25% 10% 20% N/A 20% 30% 10% 20%

Bad references 50% 10% 30% N/A 80% 30% 20% 10%

Insufficient income 0 80% 50% N/A 40% 70% 70%

Minimum size 25% N/A

Total 100% 10% 100% N/A 100% 100% 100% 100%

2.3.2 CREDIT UNDERWRITING & PORTFOLIO MANAGEMENT TECHNIQUES

Risk management techniques implemented at banks are still traditional. Existing credit underwriting is

characterized by long decision chains, centralized decision making by costly credit committees, excessive

reliance on collateral, high operational costs, partial automation, lack of advanced risk management tools,

and utilization of very limited credit information.

Credit scoring is mostly absent or at best in the early planning stages of development at some banks.

Application scoring is not utilized yet, apart from some elementary and internally built, generic systems (Table

9)35

. While retail focused lenders are on the verge of introducing risk assessment methodology, it will still take

some time before the first statistically built scoring system is developed and adopted by the credit industry in

Yemen. None of the financial entities who responded to the ACRI survey are using a custom scoring model

built by a leading international provider. Only one private bank has mentioned plans to introduce a custom

application scoring model, which will be based on the banks own portfolio data. Behavioral scoring models

and automated account management systems have yet to be introduced. However, this may be due to the

small size of consumer portfolios.

Table 9: Scoring utilization

Particular Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8

Scoring utilization No No No No No No Internal Internal

Automated credit application processing has not been implemented at any of the banks in Yemen (Table 10).

This may remain difficult to achieve till such time that the CBY PCR and internal bank systems are upgraded.

A typical information verification process workflow may entail separate:

i) Inquiry to CBYs PCR, and

ii) Informal banking reference checks (with other lenders).

35 Questionnaires supplied by Yemeni banks to the ACRI team, October 2009.


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Table 10: Full Automated Application

Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8

Full automated application No No No No No No No No

These procedures are often not integrated in the lenders main application processing systems , leading to

delayed approvals and increased operational costs. Generally, credit decisions are taken by a credit

committee staffed with several resources. More recently, banks have adopted decisional delegation matrixes,

allowing branches to take some decisions for smaller amounts.

Banks will need to fine-tune their credit policies and portfolio strategies going forward. Additionally, the entire

lending industry will have to significantly upgrade existing systems to support strong growth and increased

volume of business. Furthermore, there remains a significant disparity between the level of technology and

internal capacity between banks and microfinance institutions, as MFIs are operating at a much more basic

level and are in need of support.

Training in advanced risk management techniques and adoption of tools will be critical to the further

development of lending. Increasing these skills inside the credit industry, would bring immense positive

results, and support the expansion of access to finance for potentially good customers.


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"Full " (information shared bybanks, retailers, NBFIs)

"Fragmented"(e.g.in formation shared amongbanks o nly or retail only)

Lower Predictiveness (e.g.Mexico, Kuwait)

Lower Predictiveness (e.g.Botswana)

High Predictiveness ( e.g.U.S.,UK,Indi a)

Lower Predictiveness (e.g.Australia, Switerland)

Postive & NegativeInformation

Negative In formation

sourcesofinformation

types ofinformation

3. STATUS OF CREDIT REPORTING IN YEMEN

3.1 OVERVIEW

While CBY is operating a Public Credit Registry, there are no private sector credit information providersoperating in Yemen. Banks in Yemen typically rely on customer references that are informally exchanged on

a case-by-case basis without any regulation, and offer no protection for borrowers privacy or rights.

The CBY has recently received and implemented the PCR software from the Central Bank of the U.A.E. This

system will be rolled out pending the successful completion of the test phase. This will help achieve an

automated credit information sharing system, providing CBY with an effective supervisory tool to monitor the

credit growth and support the banking sector in increasing access to credit to deserving clients. The main

enhancement of the new PCR is online data reporting and inquiry processes, and inclusion of consumers

credit and small ticket loan information (after removal of the minimum threshold -YER 500,000 (US$ 2,470) -

for reporting data).

The revamped PCR system will receive and disseminate information from the sixteen regulated financial

institutions. The PCR is becoming an important tool for the evaluation and management of credit risks inside

regulated financial institutions. Moreover, the implementation of this system will lead to full sharing of positive

credit information in Yemen. Issues of data quality and quantity will persist within the PCR, as several

financial institutions are currently unable to provide the full data set in a systematic and regular manner.

MFIs are working with SFD on a pilot for collecting credit information from associated MFIs. The data is

essentially demographic information (name, ID, address) which is then being aggregated to develop a

black list. There is no positive information or any type of loan data being considered for dissemination.

Banks, as a major lending sector, are not participating in this pilot project. Borrowers consent is not

required to share customer information; this could create a potential legal issue.

With increased focus on small ticket loans by

commercial banks, a project is being undertaken

by the Yemen Banks Association (YBA) which

aims at establishing a private credit bureau,

limited to banks only. CBY has granted an

authorization to YBA to establish a PCB.However, the development is on hold till the

launch of the new CBYs PCR. If YBA were to

undertake the development of a PCB system, the

participation of a skilled, technological

provider/partner may be required.

Figure 20: Scenario of credit information sharing


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The development of credit information databases should seek to develop an integrated database across all

segments of borrowers and lenders. In the absence of this, the effectiveness of integrated and

comprehensive credit information would reduce the efficacy of the PCR/PCB by fragmenting the financial

profile and credit history of borrowers. Consolidated databases containing all the credit information (positive

and negative) provided by all lending sectors should be encouraged to promote quality and effectiveness of

information sharing services. All banks and MFIs in Yemen agree on the need to contribute data to a single

pooled database.

Although the PCR shares information among regulated financial entities only, the inclusion of MFIs in

information sharing will improve the breadth and depth of information. This dataset can then be used to

enhance the risk assessment available to participants. The success of the PCR will also depend on

increased awareness of credit information sharing concepts and the benefits it can accrue through a wider

range of service offerings.

CBYs guidance, monitoring, and training of financial institutions on the PCRs functionality and services will

be important. This will ensure that lenders: i) provide the entirety of the information included in their portfolio,

regardless of the loan amount; ii) improve the quality of data provided to the PCR; and iii) ensure regulatory

compliance.

Financial institutions will need to commit resources towards upgrading systems and aligning procedures to

enable regular sharing of consumer and corporate loan data. They will also need to provide extensive staff

training as the lack of familiarity of existing bank staff with the new technology and processes may undermine

the success of the credit reporting. Only a portion of the existing banks36

are currently able to provide the

complete portfolio data to the CBY. These efforts should be a priority for lenders with the strong support of

the CBY.

3.2 PRIVATE INFORMATION PROVIDERS

As mentioned, there are no private information providers operating in Yemen, and no positive information

sharing schemes are present yet. Black list (court judgments, derogatory information, tribunal sentences) are

neither collected nor disseminated in a formalized manner by any private information provider.

Regarding the establishment of a PCB in the future, there is no identified private sector entity with the

requisite knowledge, skill set, technology, previous experience, and business know-how to establish and offer

a comprehensive and robust credit reporting. Fulfilling the requirements of a hypothetical RFP (Request for

Proposal) and independently bidding for the establishment of a full-file, state-of-the-art PCB may be difficult

for a local vendor. Thus the direct participation of a reputed international information provider may need to be

considered.

36 As of March 2009 only 16 banks were contributing data to the CBYs PCR, mostly alleging technical problems.


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3.3 THE PUBLIC CREDIT REGISTRY OF THE CBY

PCRs are mostly operated by Central Banks and in some instances by the Superintendence of Financial

Entities (e.g. in Latin America). They are the major aggregator of credit and loan information but are mostly

limited to information from the financial institutions they supervise, under mandate of the law or through

regulation.

The information stored in these databases is mostly used to support the prudential regulation and banking

supervision. The data is generally used as well to supply services to internal customers (e.g. monetary

policies department, statistical department, etc.) and to produce economic analysis and research (analyzing

credit sectors, credit quality, credit risk models, largest borrowers, ratios, lending concentration, statistics,

etc.).

PCRs are often set-up as the first institution to

foster local credit information sharing, instilling

a culture among financial institutions to report

this data, and disseminating aggregated

information as credit reports. This is because

information sharing is a fundamental necessity

in any financial market, and the benefits offered

by complete credit reporting systems are

supported by copious empirical evidence37

.

Few examples of such benefits are mitigated

moral hazard and adverse selection, reduced

default rates, reduced credit cost and increased

access to credit.

PCRs are more likely to remain present where

private sector information sharing

arrangements, such as PCBs, have not taken

root. Sometimes38

, PCRs also supply

information to PCBs under the Central Bank

mandate that requires all lenders to report

positive and negative credit information.

37Jappelli, T. and M. Pagano, Information Sharing in Credit Markets: International Evidence, Inter-American Development Bank,Working Paper R-371, June 1999. Further statistical evidence for Brazil and Argentina has been found in Majnoni, G., M. Miller,N. Mylenko and A. Powell, Improving Credit Information, Bank Regulation and Supervision: On the Role and Design of PublicCredit Registries, World Bank, June 2004. See also Barron J. and M. Staten, The Value of Comprehensive Credit Reports:Lessons from the U.S. Experience, Purdue and Georgetown Universities, 2003.

38 Ecuador, Morocco, Bolivia, and Peru, for example, are among the countries where the supervising authorities of banks, shareinformation directly with Private Credit Bureaus.

Credit Applicants(information)

Regulated entitiesBanks

Regulatedentities IBFI

Credit Bureaus(with an d/ or without bo rrower's consent

Bank 1

1

2

3

Regulatedentities MFI

Non-regulatedcommercial

entities

Non-regulatedfinancial entities

Bank 2 Bank 3 NBFI MFI Retailer TELCO

Figure 22: Voluntary credit information sharing model

Credit Applicants(information)

Regulated entitiesBanks

Regulatedentities IBFI

Central Bank(no borrower's consent required)

PCB 1

Bank 1

1

2

3

5

4

Regulatedentities MFI

Non-regulatedcommercial

entities

Non-regulatedfinancial entities

PCB 2 PCB 3 PCB 4

Borrowers' consentis required

Bank 2 Bank 3 NBFI MFI Retailer TELCO

Figure 21: Mandatory credit information sharing model


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However, PCRs and PCBs can co-exist by maintaining complementary roles while promoting the

development, operation and maturing of the credit information market.

In Yemen, CBY established the first paper-based PCR in 1975. In 1998, the first system revision led to the

introduction of some automated functionality. In April 2009, a thorough revamp of the system was undertaken

with the new software currently being tested before roll-out. The CBYs PCR is used for internal reporting andmonitoring purposes and, is currently, the only organized source of credit information available to the lenders

for credit risk assessment in Yemen.

All the financial institutions supervised by CBY are mandated to report all credit information on all borrowers,

without any limit on the loan amount or the customer segment39

. However, the quantity of data records

reported and stored in the PCR is still very limited. The PCR covers less than 0.2% of the Yemeni population

(Table 11)40

.

Table 11: Procuring Credit in Middle East and North Africa 2010

Economy YearGetting Credit

RankDepth of credit

information Index (0-6)Public registry

coverage (% of adults)Private bureau

coverage (% of adults)

Algeria 2010 135 2 0.2 0

Bahrain 2010 87 4 0 34.9

Djibouti 2010 177 1 0.2 0

Egypt 2010 71 6 2.5 8.2

Iran 2010 113 3 31.3 0

Iraq 2010 167 0 0 0

Jordan 2010 127 2 1 0

Kuwait 2010 87 4 0 30.4

Lebanon 2010 87 5 8.3 0

Morocco 2010 87 5 0 14

Oman 2010 127 2 17 0

Qatar 2010 135 2 0 0

Saudi Arabia 2010 61 6 0 17.9

Syria 2010 181 0 0 0

Tunisia 2010 87 5 19.9 0

U.A.E. 2010 71 5 7.3 12.6

West Bank and Gaza 2010 167 3 6.5 0

Yemen 2010 150 2 0.2 0

As of October 9, 2009, the number of borrower records provided by financial institutions was 16,642 for a

total outstanding volume of YER 336 million (USD 1.64 million). Of the 16,642 records registered in the PCR,

14,893 belong to individuals, 1288 to sole traders, 8 to governmental agencies, and 453 to business firms

(Figure 23).

39 The former threshold of YER 500,000 has been eliminated by the CBY aiming at collecting consumers and other small ticketloans data.

40 World Bank/IFC, Doing Business Report: Getting Credit in Middle East and North Africa, 2010.


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The team responsible for the PCRs operation is

composed of nine officials; three for IT and system

maintenance, and six to follow day by day activity

and the relationship with the users/data providers.

The following are the main features of the new PCR

system at CBY:

a. Online inquiry and update.

b. Positive and negative information about firms

and individual borrowers.

c. Regulated financial institutions mandated to

report all data with no minimum threshold being applied.

d. A commercial registry number generated by the PCR system automatically for each new customer

(business firms and/or consumers).

e. Regulated financial institutions mandated to get a PCR report prior to granting credit.f. Inquiries followed by online updated transactions for newly approved loans.

g. For existing loans, every new transaction registered by the lenders generates updates on borrowers

account in the PCR system.

h. Updates are transmitted daily.

i. No fees are charged to lenders for the credit reports provided.

j. CBY issued regulation enforcingborrowers rights on their own information.

A comparison of the data reported by two

banks having the largest number of retail

customers (Figure 24) shows only 4.7% and

2.3% of all their active loans being reported.

This low level of reporting is due to the

inability of such institutions to capture, collect

and subsequently report data in a timely

manner to the CBY. A summary of all 16

banks data contributed to the PCR, as of

October 2009, reports a low level of

customers.

1

8

192

260

1,288

14,893

- 5,000 10,000 15,000 20,000

FI

Govt.

JSC

LLC

Sole

Individuals

Figure 23: Type of borrowers vs. Count (All Banks)

Bank 1 Bank 2

Loans 23,422 40,159

Contributions to PCR 537 1,884

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,00045,000

Figure 24: Loans provided to PCR (as of Oct 7, 2009)


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Table 12 Banks Loans Reported to the PCR - 2009

S No. Bank NameTotal

CustomersUsed

FundedUsed

ContingentTotal Used YER

1 Arab Bank 1,163 49,095,705 21,006,603 70,102,308

2 International Bank Of Yemen 5,307 22,761,323 13,918,426 36,679,729

3 Saba Islamic Bank 3,748 22,622,572 13,085,237 35,707,809

4 Yemen Commercial Bank 1,061 8,110,541 18,548,795 26,659,336

5 Shamil Bank Of Yemen & Bahrain 628 9,713,003 15,790,080 25,503,083

6 Calyon Credit Agricole CIB 191 6,108,417 16,056,705 22,165,122

7 United Bank LTD 118 13,347,254 7,039,076 20,386,330

8 Co operative & Agricultural Credit Bank 1,186 9,247,972 9,878,719 19,126,691

9The Yemen Bank for Reconstruction andDevelopment

636 6,558,339 12,107,629 18,724,665

10 National Bank of Yemen 545 7,188,374 8,369,080 15,557,454

11 Yemen Gulf bank 235 4,220,164 8,566,365 12,786,529

12 Yemen Kuwait Bank for Trade & Investment 219 4,848,381 7,272,883 12,121,264

13 Tadhamon Islamic Bank 351 8,078,329 2,197,177 10,275,506

14 Islamic Bank of Yemen for Finance and Investment 523 5,030,683 1,899,967 6,930,650

15 Qatar National Bank (QNB) 14 610,707 2,730,534 3,341,241

16 Rafidan Bank 17 93,531 0 93,531

Total 16,642 336,161,248

While all data concerning business customers is generally provided, most banks seem less equipped to

provide data on smaller loans (below the threshold of YER 500,000), which is the category of loans

recently added to the PCR. Though this circumstance is possibly the result of persisting technical issues,it is in contravention to the basic principle of reciprocity

41necessary for the success ofcredit reporting.

Even if one lender is not contributing the complete and comprehensive dataset to the registry, it may

prejudice the quality of the database, credit underwriting process and customer evaluation carried out by

other financial institutions.

Among the most significant issues limiting the performance of the registr

ACRI-MENA ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010

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