arab credit reporting initiative green book

2009

AN ASSESSMENT OF

THE STATUS OF THE

NATIONAL CREDIT

REPORTING SYSTEM

IN YEMEN

July 2010

ARAB CREDIT REPORTING INITIATIVE: GREEN BOOK

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

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



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 transaction

costs 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 IFC’s global

expertise in developing credit information services1 and AMF’s 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 on http://www.ifc.org, while information about AMF is available on http://www.amf.org.ae.

Oscar Madeddu Mohammed Taha Rafi Hafid Oubrik

Credit Bureau and Risk

Management Advisor

International Finance Corporation

MENA Credit Bureau Program

International Finance Corporation

Payment Systems Specialist

Arab Monetary Fund

1 IFC has extensive experience developing credit information systems in emerging markets. Since 2001, IFC’s Global Credit Bureau Program has helped create and/or significantly improve 13 credit bureaus, contributed to drafting credit information laws in 21 countries, 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.amf.org.ae/



CONTENTS

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

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

1.2. DEMOGRAPHICS AND POPULATION TRENDS ..................................................... 7

2. STATUS OF CREDIT AND FINANCIAL MARKETS ...................................... 9

2.1 ACCESS TO FINANCE .................................................................................................... 9

2.2 MARKET PLAYERS ....................................................................................................... 13 2.2.1 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 ... 23

3. STATUS OF CREDIT REPORTING IN YEMEN ............................................. 25

3.1 OVERVIEW ...................................................................................................................... 25

3.2 PRIVATE INFORMATION PROVIDERS..................................................................... 26

3.3 THE PUBLIC CREDIT REGISTRY OF THE CBY ..................................................... 27

3.4 UPGRADING THE PUBLIC CREDIT REGISTRY OF THE CBY ........................... 32

3.5. PUBLIC INFORMATION SOURCES .......................................................................... 38

3.6. OTHER STAKEHOLDERS .......................................................................................... 38 3.6.1. 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 ............................... 43 4.1.1 SUPERVISION .......................................................................................................................... 43

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

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



4.2 LEGISLATION IMPACTING CREDIT REPORTING IN YEMEN ............................ 45

4.3 BORROWERS’ CONSENT ........................................................................................... 50

4.4 NATIONAL IDENTIFICATION NUMBER ................................................................... 50

5. CONCLUSIONS ............................................................................................................ 51

5.1. A STRATEGY TO ENHANCE YEMEN’S NATIONAL CREDIT REPORTING SYSTEM .................................................................................................................................. 51

5.2 COMPARING EXISTING AND IDEAL CREDIT REPORTING MODELS ............. 54

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



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

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

Yemen’s 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 Yemen’s

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.

Yemen’s 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

Yemen’s economy partially compensated for

reduced oil revenues. Similar trends persisted

in 2009 with a registered sharp decline in oil

revenues 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 Sana’a Yemen Economic Update, Spring 2009

3 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

8

10

12

14

16

18

20

Figure 3: GDP and Consumer Price Index(*) 2008 estimate

Figure 3: GDP and Consumer Price Index

(*) 2008 estimate

http://www.indexmundi.com/yemen/gdp_per_capita_(ppp).html



280

300

320

340

360

380

400

420

440

460

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

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

Yemen’s 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, national

identification, 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 country’s population, with an annual growth rate of 3.4%5, is expected to triple by 2050 to 58 million

6

(Figures 5 and 6). Yemen’s 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 Sana’a are expected to double the number of inhabitants within the next

15 years (Table 1).

4 The World Bank Sana’a, Yemen Economic Update, Spring 2009 5 Index Mundi, Yemen Demographic Profile, http://www.indexmundi.com/yemen/demographics_profile.html, 2009

6 Population Reference Bureau, http://www.prb.org/Countries/Yemen.aspx#, October 21, 2009

http://www.indexmundi.com/yemen/demographics_profile.html

http://www.prb.org/Countries/Yemen.aspx



(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 Education8

Stage 2005/2006 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 2005-20257

City 2005 2007 2010 2015 2020 2025

Al Hudaydah 672 780 951 1232 1528 1854

Sana’a’ 1801 2008 2345 2955 3636 4382

Ta’izz 657 751 902 1159 1437 1743

http://esa.un.org/unup



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 - all

unregulated.

• 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 Yemen

is 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 individual

consumers, principally those from the

non-salaried category.

Currently, the total number of borrowers being

served by Yemen’s 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.

9 Social and Economic Development Group MENA’s Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action

Plan, 2008 10

Central Bank of Yemen, Presentation at the ACRI workshop, Abu Dhabi, November 9, 2009

1%14%

7%

42%

22%

14%

Figure 6: Credit Distribution by sector(2007)

Agriculture and Fishing

Industry

Construction

Trade

Others

Classified Loans

Figure 7: Credit distribution by sector (2007)



Banks are well positioned to significantly expand credit and play a greater role in Yemen’s 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 five

years 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.

11

Social and Economic Development Group MENA’s Financial Sector Review Yemen Financial Sector Reform: a Proposed Action Plan, 2008 12

Central Bank of Yemen, Presentation at the ACRI workshop, Abu Dhabi, November 9, 2009 13

World Bank. Finance for All comparator countries are Albania, Bolivia, Ethiopia, Ghana, Honduras, Kenya, Tanzania, Uganda and Zambia. Bangladesh and Pakistan have much more developed financial systems, nearly five times as many bank branches, and are not 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



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 the

practice 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 creditor’s 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, MENA’s Financial Sector Review, “Yemen Financial Sector Reform: a Proposed Action Plan”, 2008 and “Investment Climate Assessment”, 2006

Yearالسنة

Itemالبيان

Banks1 17 17 18 18 18البنوك1

The Central Bank1-1 1 1 1 1 1البنك المركزي1-1

Commercial banks1-2 10 10 11 11 11البنوك التجارية1-2

Islamic banks1-3 4 4 4 4 4البنوك الأسلامية1-3

Specialized banks1-4 2 2 2 2 2البنوك التخصصية1-4

Exchange2 463 410 349 341 299الصرافة2

141417Exchange companies2-1 10 7شركات الصرافة2-1

335396446Exchange offices2-2 331 292محلات الصرافة2-2

16 16 16 15 15شركات التأمين وصناديق التقاعد3Insurance Corporations &

Pension funds3

1111121212Insurance Corporations3-1 شركات التأمين3-1

44444Pension and annuity funds3-2 صناديق التقاعد والمعاشات 3-2

332374383443496

أعداد المنشآت والمؤسسات المالية خلال الفترة 2002-2006م

Number of Financial Establishments and Corporations: 2002 to 2006

20052006*

الاجمالي

ية * بيانات أول

200220032004م

(1) Central Bank of Yemen for data on banks and exchange companies, several

bulletins

* Preliminary data

Total

S

(2) Ministry of Industry & Commerce for Insurance Companies

(3) Ministry of Finance for Pension and annuity funds

Sources of data:

بنك المركزي للبنوك وشركات الصرافة، نشرات متفرقة )1( ال

تأمين تجارة لشركات ال صناعة وال )2( وزارة ال

معاشات تقاعد وال )3( وزارة المالية لصناديق ال

بيانات: مصادر ال

Government Demand Time SavingsForeign

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)



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 and

August 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



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 penetration

and 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.



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.

Yemen’s bank network is severely under

branched. The banking sector’s branch network is

comprised of 228 branches19

with the highest

concentration in Sana’a20

. 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.

18

Social and Economic Development Group, MENA’s Financial Sector Review, “Yemen Financial Sector Reform: a Proposed Action Plan”, 2008 19

Central Bank of Yemen, November, 2009 20

Central Bank of Yemen, Annual Report, 2007 21

CGAP, Financial Access, http://www.cgap.org/financialindicators, 2009 22

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

(YER million)

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

500,000

600,000

700,000

800,000

900,000

1,000,000

http://www.cgap.org/financialindicators




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 gaining

importance 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 Sana’a; 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-bankable borrowers, 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, 2007 24

CGAP, Financial Access, http://www.cgap.org/financialindicators, 2009 25

Small and Micro Enterprise Development in Yemen, SFD, 2009 26

Lenders’ estimate

2005 2006 2007

ATM 117 163 238

0

50

100

150

200

250

Figure 14: Automated Teller MachinesFigure 15: Automated Teller Machines

2.00

910.00

Figure 15: Total outstanding loans volume-YER billions (August 2009)

MFI BANKS

Figure 16: Total outstanding loans volume-

YER billions (August 2009)

742417

12,132

5,0053561

3500

3116

2365

2378

2118

1370 1378

Figure: 16 Total outstanding microcredit loans ( as of march 2009)

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)




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 partial

undertaking 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-Amal’s 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 grants

solidarity 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 CBY’s PCR. As of October 2009,

this was not the case. Al-Amal claims a very low

Portfolio 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%

Figure 17: Al-Amal Bank Shareholders

Private Sector 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)



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, psychological”

pressure 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 sharing

concept 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 better

managed 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.



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

consumer’s 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 and

negotiation 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, 2009 28

Market Research.Com, http://www.marketresearch.com/product/display.asp?productid=2384211, October, 2009 29

Market Research.Com, http://www.marketresearch.com/product/display.asp?productid=2384211, October, 2009

http://www.marketresearch.com/product/display.asp?productid=2384211

http://www.marketresearch.com/product/display.asp?productid=2384211



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 Sana’a 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 under

control, 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 country’s 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 country’s 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/



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. Government’s 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 and

guarantees 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.



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 CREDIT PRODUCT

COLLATERAL REQUIRED (YES/NO)

% OF CREDIT ACCOUNTS FOR WHICH

COLLATERAL IS REQUIRED

OTHER TYPE OF GUARANTEE, 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

MICROCREDIT LOANS

- - -

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 full

credit 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, MENA’s Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008.



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 23.32

Source: 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 RATES

The 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.



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 CBY’s PCR, and

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

35

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



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.



"Full" (information shared by banks, retailers, NBFIs)

"Fragmented"(e.g.information shared among

banks only or retail only)

Lower Predictiveness (e.g. Mexico, Kuwait)

Lower Predictiveness (e.g. Botswana)

High Predictiveness ( e.g. U.S., UK,India)

Lower Predictiveness (e.g. Australia, Switerland)

Postive & Negative Information

Negative Information

sources of information

Fig 19: Scenarios of credit information sharing

types of information

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 providers

operating 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 CBY’s 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



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.

CBY’s guidance, monitoring, and training of financial institutions on the PCR’s 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 CBY’s PCR, mostly alleging technical problems.



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.

37

Jappelli, 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 Public Credit 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, share

information directly with Private Credit Bureaus.

Credit Applicants(information)

Regulated entitiesBanks

Regulatedentities IBFI

Credit Bureaus(with and/ or without borrower's consent

Bank 1

1

2

3

Fig 21: Voluntary credit information sharing model

Regulated entities MFI

Non-regulated commercial

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

Fig 20: Mandatory credit information sharing model

Regulated entities MFI

Non-regulated commercial

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



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 CBY’s PCR is used for internal reporting and

monitoring 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 Year

Getting Credit

Rank Depth 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 ticket loans data. 40

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



The team responsible for the PCR’s 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 enforcing borrowers’ 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 22: Types of borrowers vs. Count (All Banks)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

40,000

45,000

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



Table 12 Banks Loans Reported to the PCR - 2009

S No. Bank Name Total

Customers Used

Funded Used

Contingent Total 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

9 The Yemen Bank for Reconstruction and Development

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”41

necessary for the success of credit 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 registry are:

i) Data returned is minimal and in an aggregated form. Reports do not include historical data and

arrears (current, worst, oldest, most recent, legal status, etc.). This is reflected in the sample

business firm credit report (only six heads of information are available).The same type of report with

limited information is provided to lenders in case of individual consumer.

41

The “reciprocity principle” is a basic guideline of credit reporting, and prescribes that no inquiries to the credit bureau are allowed for users who do not contribute their credit information to the pooled database.



Table 13 PCR’s Credit Report for a Business Firm

S No. Bank Name Limit

Funded Limit

Contingent Limit Total Used

Funded Used

Contingent Used Total Fac.

Class.

1 Saba Islamic Bank 27,468 0 27,468 27,468 0 27,468 O.L.E.M.

Total 27,468 0 27,468 27,468 0 27,468

ii) Absence of automated logic checks on quantity of records provided. The system is not equipped with

logic control/comparison with quantity of data provided, account closures, etc.

Table 14 PCR’s Credit Report for an Individual

S No. Bank Name Limit

Funded Limit

Contingent Limit Total

Used Funded

Used Contingent

Used Total

Fac. Class.

1 Co operative & Agriculture Credit Bank

810 0 810 810 0 810 Normal

Total 810 0 810 810 0 810

iii) Absence of automated logic checks on quality of records. These checks are done manually by the

PCR staff when the initial registration of a new customer is made to the PCR, through the first

lenders’ inquiry, and again when the same is returned with correct data. This time and cost

consuming process is also labor intensive and can be a source of significant savings.

iv) Weak performance of the matching algorithm based on an unsophisticated search key (name and

surname plus any available personal identification number).

v) Negligible utilization of the new National ID number (unique, definitive ID number) which would

strengthen database quality and reduce manual interventions of PCR staff.

vi) Limited data returned to lenders, under an aggregated form which is inadequate for underwriting

consumer and SME credit.

vii) System tailored to mainly service regulated-supervised financial entities.

viii) System customized to accommodate mainly business data and supply information services to

evaluate corporate and firm applicants, which may not suffice to support and serve a massive growth

of the credit system.

ix) Ancillary services and additional characteristics that can be generated by the activity of the lenders

with PCR not yet contemplated (e.g. previous searches list).

x) Absence of intensive and on-going training plan for IT and PCR staff on new system.

xi) Absence of back-up IT and telecom systems, and disaster recovery plans.

xii) Absence of clear procedures for consumers’ rights enforcement.

xiii) Erratic requests of borrowers’ consent by lenders.

xiv) Lack of clear procedures and controls on data to be carried out during on-site supervisory audits

xv) Absence of any checks on lenders’ inquiry activity and data provision to the PCR.

xvi) Non integration of unpaid checks file.

xvii) Lack of mechanism to integrate other external files/data (e.g. balance sheets, civil register,

telephone directories, public derogatory information).



xviii) Lack of a periodical management report on PCR activity (e.g. security logs, hit-ratio).

xix) Deadlines, sanctions and violations in case of dissatisfactory compliance to be systematically

applied.

xx) Law does not clearly establish any time limit for keeping historical data stored inside the database.

3.4 UPGRADING THE PUBLIC CREDIT REGISTRY OF THE CBY

The above issues require further capacity building investments at CBY for staffing, training, IT systems,

telecommunications, etc. The CBY’s endeavor to make the PCR an effective tool for credit underwriting and

supervision should be pursued as the registry represents the fulcrum of the credit reporting system in Yemen.

In addition, it is expected that for another 2-3 years the PCR will probably remain the only available source of

information (as establishing a PCB can take 24-30 months). For the medium term, CBY’s objective should be

to support an advanced, private, integrated, full information sharing system eradicating any legal constraints

that may affect the establishment of such a scheme.

Although the PCR system source code has been provided to CBY, the IT structure dedicated to the

maintenance of the system has not received sufficient training on the system features and functionalities.

This limits the possibility of a quick implementation of the system functionalities, as well as the possibilities of

upgrade, improvement, customization to the needs of CBY and of the lenders. An on-site training conducted

by the organization which delivered the system, is definitely needed to allow the PCR team to perform the

necessary enhancements and realize its full potential.

The new national ID number introduced by the government is an important tool for the establishment of a

reliable credit reporting system. The national ID card bears a registration number that is unique (prevents

duplications) and definitive (it remains tagged with citizens indefinitely and is also useful in the case of loss or

renewal). National ID numbers are a powerful and indispensable tool for the consolidation of the PCR

database, as well as a reliable search key for potential credit registry/private credit bureaus.

However, the National ID has not been provided to all citizens, and this undermines CBY’s efforts to improve

the quality of the PCR, provokes fragmentation of credit histories inside the database, and does not permit

quality enhancement. Mandating users to always obtain the National ID number, whenever opening a new

banking relationship with a customer may substantially improve the quality of the PCR. One option may be to

mandate that no bank account should be opened in Yemen unless the applicant provides a National ID

number. A link should be set up, between the civil registry containing the National ID database (at the Ministry

of Interior) and the CBY’s PCR, in order to match online, the ID supplied by the lenders and confirm its

correctness.



Table 15 SFD supported Microfinance Institutions and Programs, March 2009

S/N

Program

Active Number of Clients

Outstanding loan portfolio (Million YER)

PAR %

Cumulative numbers

Area of operation Borrowers

Savers

Total Women %

Total Number of loans

Loan amounts (Million YER)

1 National MF Foundation

12,132 99 14,856 266 3 52,622 1,713 Capital City,Taiz,Qa’edah and Yarim in Ibb and Dhamar

2 MF Development Program (Nama*)

5,005 33 930 170 0.1 26,131 1,121 Sana’a , Taiz , Aden

3 Abyan S & C 3,561 100 3,832 74 0 12,703 427 Abyan

4 Aden MF Foundation

3,500 92 5,731 62 0 22,060 25 Dar Sa’ad,Al-Buraikah, Al-Mu’alla, Al Tawwahi, Crater Khormaksar, Sheikh Othman- Aden,Lahej

5 Al-Awa’el MF Company

3,116 100 0 56 5 30,718 656 Taiz

6 Sana’a MF 2,365 82 1,947 57 16.7 18,516 670 Capital City

7

Social Institution for Sustainable Development (SFSD)

2,378 87 0 97 0 8,455 463 Capital City

8 Small Enterprise Development Fund

2,118 4 1,080 1 8,080 5,902 Capital City, Taiz, Aden, Al-Mukalla

9 Al-Hudaidah MC 1,370 74 0 13 N.A 30,161 729 Al-Hudaidah city and Bajil – Al-Hudaidah governorate

10 Wadi Hadhramaut 1,387 30 1849 50 10.4 6,277 365 Seyoun – Hadhramaut governorate

11 Al-Amal Microfinance Bank

742 35 1,285 49 0 766 50 Capital City

12 SOFD 417 76 0 6 14.9 9,235 195 Capital City

13 Other Activities & IGPs

NA NA NA 0 NA 27,926 753 Several areas

Total 38,091 30,430 1,980 253,650 12,316

With regard to MFIs, only two (Al-Amal Microfinance Bank and Tadhamon International Islamic Bank) are

regulated by the CBY. They are therefore mandated to supply information to the PCR. The residual 11 MFIs

supported by the SFD are not under CBY purview, but they do possess a large number of records (38,091

clients as of March 2009), which information is not yet part of the PCR (Box 5). The value of this information

for the credit system will be greater; therefore a legal and technical solution to accommodate these non-

regulated MFIs in the credit registry sharing and inquiring mechanism should be pursued.



BOX 5: PCR’s role and challenges

In conclusion, the CBY should consider the PCR as an

important transitional tool in a medium term strategy

towards the development of a PCB in Yemen.

International experience shows that, while public credit

registries’ main purpose is being a paramount

instrument in bank supervision and prudential

regulation, they can also have an important preparatory

role in facilitating the development of the private credit

reporting industry. This role can be accomplished by

promoting the establishment of complete, efficient and

reliable private credit bureaus, by enabling a friendly

legal framework, by creating awareness among lenders

and social responsibility among borrowers, and by

enhancing the confidence of the consumers through a

deep, direct involvement in solving their complaints

related to credit reporting activities.

In the future, other sectors that are currently not

sufficiently developed will likely play a significant

role in the credit system. Retailers, supermarkets,

furniture and appliances merchants, as well as

mobile telephone companies, and other similar

lending segments, might progressively enter the

credit market directly, acquiring an increasing

share of consumer credit. They must be

considered eligible to participate with full rights to

a PCB scheme. This is a crucial issue since

capacity to predict risk is given by data

completeness (both negative and positive data)

and by the participation of all regulated and non-

regulated lending sectors. The CBY should

encourage the set-up of an effective PCB along

theses lines.

The CBY has started a project aiming at significantly revamping the existing PCR. The main areas of

improvement of the current system can be summarized as follows:

1. IMPROVE THE QUALITY OF INFORMATION

In light of the decision to eliminate the YER 500,000 threshold in the system, the quality of the

information is extremely important. Since the volume of accounts transmitted to the PCR and to be

manually checked by the PCR staff will increase significantly, it will be difficult to efficiently manage such

a growth without significant investment, and increase of staff, and resources. Therefore, to start with, the

new National ID (NID) should be introduced as the primary PCR search key utilized for inquiries in the

system. The NID is mandatory in Yemen for all citizens older than 16 years and the system can

accommodate the NID. Financial institutions should be mandated to: i) always require the NID for any

new account opened, and ii) always supply the NID for any transaction with the PCR (either incoming or

outgoing).

The PCR should refuse to store records inside the database or to answer to a user’s inquiry, unless the

NID number is part of the request (for those types of customers eligible for an NID).

These measures would strongly improve the data matching efficiency, the overall quality, and the

consistency of the database, while decreasing manual checks and corrections made by the PCR staff

and allowing the dissemination of more reliable data to the lenders. Administrative sanctions and

penalties should be established and consistently applied when these standards are not met. PCR could

suspend the service in case of recidivist users’ behavior.



These provisions are important not only for the sake of the PCR but for a better harmonization of

information flows in Yemen. The NID database at the Civil Registry Authority (Ministry of Interior) could

be linked to the PCR, allowing cross-checking of NIDs provided by the users.

2. IMPROVE THE QUANTITY OF INFORMATION

Existing regulatory framework should be systematically enforced (Articles 71 and 72 of the Banking Law

n.38 of 1998) and/or new regulations issued to ensure the mandatory sharing of data with the PCR and

referring to the PCR database before granting credit are complied with by the lending industry. This will

warrant that the quantity of information inside the database really corresponds to the loans granted by the

credit system. As mentioned before in this report, one of the fundamental concepts of modern information

sharing is the “Reciprocity Principle”, establishing that only those users who provide the information are

allowed to inquire from the credit registry. The Supervision Department of CBY would also have to

introduce new audit procedures during on-site missions, exclusively implemented to check that lenders

are fully complying with the regulations/laws on data provisions/inquiry, and supplying the whole portfolio.

3. ENLARGE LENDERS PARTICIPATION TO THE PCR

Regulators should contemplate the possibility to enable MFIs to contribute data to and make inquiries

from the PCR. MFIs are acquiring increasing importance in the lending panorama of Yemen, and the

rising number of loans generated by this sector can constitute important information to avoid over-

indebtedness, and to define a complete financial profile of the Yemenite borrowers. For example, in the

next five years, if growth estimates are respected, one MFI, namely Al-Amal will hold a portfolio of

approximately 100,000 customers.

Legal and technical issues would still have to be solved to allow the participation of MFIs to the scheme.

However, the enlargement of the PCR to the MFIs contribution will dramatically enhance both the quality

and the quantity of the database, permitting CBY to have complete control of all the current credit flows in

Yemen.

The SFD should support the effort by issuing a directive requiring all MFIs to request the borrower’s

consent, as part of the credit agreement, with immediate effect. Consent should dispose of the initial

main legal obstacle to share data with third parties, and supersede the bank secrecy.

4. IMPROVE SYSTEM SECURITY AND TECHNICAL CONFIGURATION

The implementation of some fundamental enhancements can improve the PCR’s performance. These

are:

Set up adequate database back-up/s, sited in different location/s than the PCR main site.

Define, test, implement, a thorough Disaster Recovery Plan to protect the system and the data, and



ensure service stability in case of catastrophic events.

Back-up the network telecommunications connection (contracting a second internet provider) in case

of failure of the existing provider, in order to ensure business continuity to the users.

Analyse system storage capacity to ensure that the system can accommodate all the information

concerning loans below the threshold of YER 500,000, as well as historical records of the country’s

financial system. The installed capacity devoted to accomplish this goal should have enough storage

space for at least a complete 5 years historical cycle.

Implement reliable and efficient security procedures, as well as regular upgrades, to prevent

intrusions into the network/system and to pre-empt external attempts to corrupt the stored data or to

interrupt the service.

Protect the system and the back-up locations by meeting the minimum physical security

requirements such as restricted entry, use of security devices (badges, passwords, biometrics, etc.)

as well as smoke/ fire detectors, humidity and temperature control, double flooring, etc.

Implement sufficient electrical operational redundancy (e.g. external generators and UPS).

Adopt procedures to control and restrict the introduction and usage of communication devices (such

as internet, e-mails, floppy disk drive units, CD writers), through which sensitive information can be

pilfered. User IDs, passwords, time-out periods, audit logs, either about users or operations carried

out within the software, must be constantly monitored.

Produce monthly management control reports (e.g. users’ activity controls, hit-ratio, number of

inquiries by users and cross-checks with accounts updates, etc.)

Implement logic controls on the quantity of updates received, against number of inquiries made -in

comparison with previous month/s.

Run training section for the lenders personnel, to improve quality of information transmitted during

inquiry, and to reduce manual checks and efforts of the PCR staff.

5. IMPROVE CREDIT REPORTS CONTENTS

The mass of information contained in the database could be exploited to improve the contents of credit

reports returned to users (currently providing minimal information in an aggregated format). Some ways

to address this information deficit are:

Historical data stored in the PCR database could be used for credit reporting purposes. Currently,

only the most recent borrowers’ information is contained in the PCR’s supplied credit reports. This

could represent a major leap forward to enhance data quality, as historical information is extremely

important to determine the true level of risk of a credit applicant.

Some of the key account performance variables that are used to determine credit risk are the past

due status and the write-off status. Debt arrears (past due) and credit write-offs should be shown in

the credit report. These characteristics provide important indications of a borrower’s credit

performance. The PCR uses only the current authorized outstanding, the credit line utilization, and

the lender’s subjective classification to measure borrowers’ performance. Showing this additional

information may probably require modification of the credit report layout and consequently, the



necessity to intervene on the software. Furthermore, banks would have to be in a position to provide

such data.

Previous searches are currently neither stored in the PCR database nor shown in the credit report.

This information (the number of time that lenders have enquired a borrower’s record during a certain

time period) is an important indicator of risk (credit shopping) for underwriting credit. This is currently

unavailable, and could be created, as this information may also prove important to measure users’

compliance in providing updates - after the initial inquiries are made to the CBY’s PCR.

6. ESTABLISH CONSUMER’S RIGHTS TO PRIVACY OF INFORMATION

Regulators should promote and encourage the protection of credit information privacy for individual

consumers. When credit information about an individual is shared, some fundamental rights must be

enforced and granted to the borrowers, like the right of individuals to view their credit report for free (at

least once a year) and the rights to challenge and correct data within strict and clearly defined deadlines -

when the data is proved as false. Consumers should be able to ask and obtain their credit report both

from the CBY and/or the lenders to whom they have applied for credit.

7. ESTABLISH A CONSUMER RELATIONSHIP UNIT

A new Consumers Service Department unit should be set-up within the CBY’s organization. This will

have the objective of supplying advice and reviewing requests raised by consumers, while granting the

above borrowers’ rights as established by the regulations.

8. ACQUIRE BORROWERS’ CONSENT

Through a regulation, the request for borrowers’ consent on all loans, regardless of the credit typology

and amount should be made mandatory by the regulators. Consent to share own data and inquiry credit

registries should be prior, informed, open (allowing sharing/inquiries with public or private third parties),

written, part of the credit application and stored under the responsibility of the lenders. A mutual effort of

public (CBY, SFD) and private (YBA) institutions should be sufficient to encourage lenders to introduce

the consent clause in each and every credit application/agreement, with immediate effect.

9. INVOLVE THE LENDING COMMUNITY

It is evident that all the above upgrades, improvements, and enforcements will heavily involve the lending

community. Regulators should engage lenders at a consultative level, creating a Credit Reporting

Working Group (CRWG), responsible for defining future strategies to improve the information sharing

system in the country. Tasks, responsibilities and deadlines should be mutually discussed and agreed

between CBY and the lending industry. Subsequently any breach of the agreements should be

sanctioned and penalties applied by CBY.



3.5. PUBLIC INFORMATION SOURCES

Public information (e.g. electoral roll, civil register, tribunal information, telephone directory) are not

abundant in Yemen. However, the complete register of new National IDs is available under an electronic

format at the Civil Registry Department of the Ministry of Interior. A link between the PCR and the NID

database, if established, would confer superior strength, matching capability, and more reliability to the

PCR database.

3.6. OTHER STAKEHOLDERS

3.6.1. MINISTRY OF FINANCE

The Ministry of Finance (MoF) is the authority responsible for formulating policies and strategies

concerning all financial government undertakings and all credit institutions, fully or partially owned by the

government (Yemen National Bank, CAC Bank, Reconstruction and Development Bank, Al-Amal Bank,

Housing Bank, etc.).

Among the key objectives of the Ministry of Finance are: i) efforts to offer broader access to credit to the

Yemeni population, ii) efforts to oversee and lead all the reforms concerning the credit industry -

proposing new legislation and enabling the legal framework. One of the major projects currently in

progress at the MoF is the revamp and the possible privatization of the only remaining public sector bank,

namely, Housing Bank. To this end, one of the proposals being considered is to massively increase its

network and its territorial coverage, by merging it with the Post Office network and making financial

services, (particularly retail services), broadly available to mainstream consumers.

The Ministry of Finance is also the authority concerned with Public Enterprises (PEs) development42

.

These are generally large government undertakings, for which the MoF becomes the principal vehicle of

financing, though PEs can be granted credit by private commercial banks. Generally, PEs financial result

is not extremely satisfactory - though a fistful are profitable. For this reason, different privatization

strategies are considered by the MoF for varied sectors and companies. A 1997 reform established that

PEs balance sheets should have been made healthier; the old bad debt cleaned, following which

companies should have been privatized. For several reasons, however, this process has been delayed.

The MoF is tirelessly working to achieve this objective with the support of multilateral organizations.

3.6.2 MINISTRY OF INTERIOR

The Ministry of Interior (MoI) manages the new National Identification database (containing the unique

and definitive identification numbers that should be provided to each and every adult citizen in Yemen) as

well as other public information registries (e.g. civil registry). This responsibility stays with the Civil

Registry office at the MoI. The Government aims at replacing all the old and varied identifications

currently circulating in the country, with the National ID number (NID). The NID is a unique, definitive,

42

67 public sector enterprises remain in Yemen



more reliable, and more difficult to forge piece of identification. The NID replaces the previous system of

national identification that was not completely electronic and online, and it is the precursor to a future

identification system (smart card based), which while maintaining the same NID number, will be utilized

for broader scopes e.g. health, tax systems, etc. The MoI estimates that nearly 30% of the population has

already received the NID, and they are willing to support any joint effort allowing a quicker penetration of

the NID, for e.g., mandatory NID requirement to open a bank account. The existence of such a system is

of high relevance for any credit information process, either public or private, and should be proactively

supported by the regulators.

3.6.3 YEMEN BANKERS ASSOCIATION

The Yemen Bankers Association (YBA) institutionally represents the credit industry of Yemen. Its Board,

chaired by a rotating President, is entrusted by banks to pursue projects and implement policies for the

common good of the sector. The most essential intervention, carried out by the YBA in the domain of

credit information sharing, is a planned project to develop a Private Credit Bureau (PCB) limited to the

exchange of information among banks. The YAB, in charge of implementing the project, has requested

the CBY for an authorization to establish the first PCB in Yemen. The CBY has authorized project

implementation. However, this was delayed to ascertain whether the new announced CBY’s PCR could

fulfill the informational and technological requirements of the industry. The Yemen Association of Banks

can be the engine for the set-up of a state-of-the-art private credit information system; however, as

already discussed, it is advisable to not set-up separate systems/databases catering for the needs of only

one lending sector.

3.6.4 SOCIAL FUND FOR DEVELOPMENT

The SFD was established by the Law No. 10 in 1997. The SFD's major function is to proactively

contribute in implementing the government's economic and social plans, by means of increasing access

for individuals, households, micro-enterprises, communities, the poor and low-income groups to

employment, production and social services. The SFD aims at providing the poor with development

opportunities, using and promoting innovative participatory approaches in delivering basic economic and

social services43

. The SFD is particularly engaged in the microfinance and SME sectors. It is estimated

that the number of SMEs are around 311,000, employing roughly 500,000 workers, of which 224,000 are

individual entrepreneurs. The investments made by these enterprises represent nearly 72% of the total

investments made in Yemen44

. The SFD has become one of Yemen's main development actors; it

participates in the implementation of the national poverty reduction strategies and contributes in achieving

the national sector goals and the Millennium Development Goals. The SFD does not overlap with the

policy, planning, or implementation functions of the ministries, and its scope of intervention is limited to

43

http://www.sfd-yemen.org/ 44

http://www.sfd-yemen.org/





national development plans and public investment programs. The SFD has become an effective tool for

the public sector to reach the poor and society's vulnerable groups45

.

3.6.5 POST OFFICE COMPANY

One of the most efficient and widespread financial services channels for small depositors is represented

by the Post Office network, with over 250 branches, widely and evenly covering the country’s territory.

The PPSC (Post and Postal Savings Corporation of Yemen), with a customer’s base of over 63,000

depositors as of June 200846

, offers simpler and cheaper procedures than the banking system does to

new customers. Its lower requirements (e.g. a postal savings account can be opened with a minimum

balance of US$1.25), facilitate the financial inclusion of the poorer and rural segments of the population.

A World Bank analysis47

shows that in 2005 the average deposit tracked at the PPSC was US$ 81.25.

The PPSC does not offer any loan or credit product yet.

45

http://www.sfd-yemen.org/ 46 Social and Economic Development Group MENA’s Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008 47

CGAP, Multi-Donor Mission: Microfinance in Yemen, 2005, and Social and Economic Development Group MENA’s Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008

Prime Minister-Chairman

Board of Director

Education

Branch Offices

Managing Director

Internal Auditing

Director Monitoring and

Evaluation Director

Programming Finance and

Administration

Information

Technology Technical Support

Cultural Heritage and Rural Road

Water and Environment

Health and social

Protection

Training and Organization

Support

Small and Micro Enterprise

development

Agriculture and rural Development

Figure 25: SFD Organization Structure



3.6.6 MONEYCHANGERS

A long-established and commonly utilized channel for financial services is represented by money

changers and bureau de change. As per CBY’s statistics, there were 521 money changers operating all

over the territory as of end 2006, compared to 465 in 2005.The main activity carried out by these financial

intermediaries is the exchange of foreign currencies. They do not offer any other type of financial

services. Money changers are licensed and supervised by the CBY, which they have to provide with

periodical activity reports. However, in practice, it is difficult for the Central Bank to perform a punctual

supervision of this category of intermediaries. Generally, money changers hold accounts with the

commercial banks, through which they can settle their cash transactions.

3.6.7 PENSION FUNDS

Pension funds are important players in the Yemen financial market. These institutions operate in the

market with substantial liquidity - generally investing in government treasury bills - as a result of some

existing restrictions to limit and mitigate investment risks. Therefore, based on sufficiently safe

investment, and marked by interesting yields, the pension funds’ financial performance has been quite

satisfactory, and apart from some losses suffered during the 90s - generally rewarding for members.

Pension funds cover all the public employees, including the army, as well as some private employees. A

revision of the current system will probably be necessary in the short term. Currently, pension benefits

and payments correspond to 100% of last salary paid to the worker after 35 years of contributions.

However this may cause imbalances to the funds in the future, especially if coverage is expanded to

current employees not being covered, and if average life expectancy increases. A larger role and

participation of the private sector in the pension system should be considered.

3.6.8 LEASING COMPANIES

Though Islamic financial transactions are becoming quite popular and despite leasing being symbiotically

related to Islamic finance, these financial transactions are generally infrequent in Yemen. Typically, the

only deals are represented by some Ijarah transactions (a form of financial transaction similar to leasing,

but in line with traditional Islamic finance) offered by some Islamic banks48

. No appropriate legal

framework existed, and this represented the main obstacle for development of leasing - until a new Law

was passed in May 2007.

Many banks have shown interest in entering this new financial sector, however some issues still hamper

the expansion of this important financial service (e.g. the tax treatment of leasing is still unclear and

penalizing, when compared to other transactions).

48 Social and Economic Development Group MENA’s Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008



3.6.9 COLLATERAL REGISTRY

No Collateral Registry is currently operating in Yemen. A collateral registry contains data concerning

movable and immovable properties which helps lenders to expand the types of collateral and

consequently increase access to credit for clients. However, certain types of collateral, such as land or

real estate, cannot be exploited. Business firms cannot utilize most of their movable assets, including

equipment inventory and accounts receivable, as collateral for obtaining financing.

3.6.10. STOCK EXCHANGE

A project to develop the country’s first Stock Exchange, enlarging financial markets as well as funding

alternatives for corporations, is under government consideration. A special unit at the MoF in charge of

the securities market is responsible for the project with international support and cooperation. The new

exchange is expected to be operational by 2011.

The securities market of Yemen is small, informal and limited to the exchange of treasury bills in the

primary market. In July 2009, the issued government bonds totaled YER 25.4 billion (USD 124.5 million),

while the total outstanding debt was YER 307.1 billion (USD 1.5 billion)49

. Bond yields in July 2009,

ranged from 12.95% to 12.97% (for three, six, and twelve month bonds). The rise of an active market for

bonds, securities, and corporate bonds, with a longer maturity, aimed at promoting individual stock

trading is desirable, and should be pursued. However, a regulatory framework will have to be developed

to enable this process, along with undertaking awareness raising amongst the public.

49 Central Bank of Yemen, Review of Monetary and Banking Developments, July 2009



4. STATUS OF LEGAL FRAMEWORK

4.1. CREDIT REPORTING LEGAL FRAMEWORK GUIDELINES

It is advisable that credit reporting, particularly when the private sector is involved, is regulated through

specific legislation. The guidelines are based on international legal best practice for the credit market.

4.1.1 SUPERVISION

PCBs should be supervised, particularly in those markets where the traditions of data protection and

information sharing are not recent or significant. However, this gives rise to the question about who

should regulate PCBs. There are several solutions:

i. In regions/countries with Data Protection Laws (e.g. E.U., Argentina), the role is generally

performed by the Data Protection Agency, a watch-dog authority purposefully established with

oversight that is not just limited to PCBs;

ii. In countries where ad-hoc credit reporting laws/regulations have been enforced recently (such as

Kazakhstan, Russia, Kenya, Tanzania, Peru, India, Ecuador, Honduras, Ghana) the regulator is

typically the Central Bank;

iii. In those countries where neither of the above is present, and since credit reporting is usually not

prohibited by existing laws, PCBs have generally begun operations on the basis of self-regulation

(Code of Conduct), but in strict consultation with banking supervisors. For example, the Saudi

Arabia Monetary Authority (SAMA) encouraged banks to start a bureau on the basis of the Code

of Conduct, to learn from experience. Later it developed regulations that would fit practices within

the country. In this case, the critical role of the Banking Supervisor which encouraged

establishing a PCB is noteworthy.

4.1.2 LICENSING

Approaches and trends greatly vary across countries. In some countries, such as Germany and Russia,

registration and not licensing with the authority is required. In another set of countries, such as Mexico,

Morocco, Thailand and Kazakhstan, licensing is required, while in Hong Kong and Australia, credit

bureaus are not licensed but are required to operate in accordance with the Code of Conduct endorsed

by the authority in charge of data privacy. Finally, in some countries- generally those with a solid,

longstanding information sharing tradition - such as the U.S., neither licensing nor registration with the

enforcing authority is required for a PCB. However, this represents an exceptional situation, and requires

a friendly, regulated, conscious and more sophisticated environment.



4.1.3 HOW TO DEAL WITH BANK SECRECY

Bank secrecy is frequently cited as one of the major culprits in inhibiting the establishment or the

expansions of information sharing. Often, even simple misinterpretations of the legal framework may be

detrimental to the start-up of a PCB. Nevertheless, balancing bank secrecy and information sharing is not

impossible, and the fast growth of credit reporting worldwide, fully functioning even in countries with the

most rigid bank secrecy, like Switzerland, is a manifestation of this possibility.

There are various legal approaches that regulators interested in the development of information sharing

and in the benefits deriving to the financial systems, can take, in order to comply with bank secrecy

provisions, while fostering a full, functional credit reporting industry. Following is an analysis of the most

common methods:

i. Open Consumer Consent and Code of Conduct:

This is an effective operational solution, though it is suggested as an interim step, towards the

creation of a comprehensive legal framework. It has been adopted in many countries where

neither a PCB regulation has been issued by the banking authorities, nor a specific legislation

was present. Consent must be unrestricted, allows sharing with either PCR/PCB, or other

lenders/parties and should be included in the credit application, such that, the consumer is in a

position to decide whether sharing information is a convenient option. Generally, a standard

Code of Conduct accompanies the consent utilization. In certain countries, consent is requested

for sharing data and inquiring PCBs. In other countries, where contributing information to the

PCB is mandatory, consent is required only for inquiries. Consent (written or digitized) is given

for a specific, limited purpose (e.g. credit granting), and may take several different forms. The

most common options are:

a. opt-in clause: explicit will to share information expressed by the customer;

b. opt-out clause: tacit, undeclared approval, valid unless the customer voices his/her refusal;

c. Separate clause: a separate document, expressly mentioning consent form and its contents.

ii. Banking Supervisory Authority’s Regulation:

This is a more structured solution that can combine speed of approval and enforcement, while

disposing of the impediments created by bank secrecy to the development of credit reporting.

Coupled with the compulsory customers’ consent, it proves to be a quick-win solution. Basically it

consists in an ad-hoc compendium of norms, not a law, enacted by the banking authorities

(Central Bank, Superintendence), aiming at regulating information sharing and including clear

consumers’ rights - as well as lenders and PCBs’ duties. An interesting example is the recent

regulation passed by the Central Bank of Egypt, which the PCB now reports to. In those

countries where banking authorities have the power to draft, approve, review, and amend such

norms, this solution is fast, practical and effective.



iii. Credit Bureau Law:

The enforcement of a specific legislation regulating PCBs is another prevalent approach adopted

in many countries and leads to the establishment of well-structured information sharing systems.

A customized and succinct law represents the best foundation for information sharing, prevents

excuses and misinterpretations about its legal viability, establishes unmistakable consumers’

rights, and allows a healthy development of credit reporting. Typically, though, this solution

requires longer approval time.

iv. Data Privacy Law:

A further option, mostly

adopted in the countries

belonging to the OECD area,

is the enforcement of a Data

Privacy Law, containing clear

provisions on confidentiality of

data that also apply to credit

information and, by default,

regulate PCB activity. As can

be seen in Figure 26, this

solution is generally adopted

in countries where there is

solid experience about

information sharing, where

consumer credit is highly developed and typically, the other solutions have already been

previously and modularly implemented.

4.2 LEGISLATION IMPACTING CREDIT REPORTING IN YEMEN

In Yemen and its current legal environment, the laws/regulations that may allow, prohibit, or hold back private

credit information sharing are the following:

i) Banking Law (No. 38 of 1998)

ii) The Law of the Central Bank of Yemen (No. 14 of 2000)

iii) The regulations impacting credit reporting issued by the CBY.

There is no other legislation present in Yemen that may influence establishment of credit reporting (e.g.

Data Privacy Law). The current legislation is sufficiently clear about the duties, responsibilities and roles

of CBY and the banks to establish a Public Credit Registry for sharing and disseminating information

amongst them, and less so about the set-up of a private information sharing scheme. Therefore, the

current legislation should not be considered as an obstacle towards credit reporting among financial

26

108

10

7

Rich Middle Income

Poor

19

24

10

2

Rich Middle Income

Poor

Banking law governs credit

84

48

3

5

2

Rich Middle Income

Poor

Specific law for credit bureaus

Data protection law

13

5

2

Rich Middle Income

Poor

Code of conduct for data use

Figure 25: Growing regulation of private credit bureaus

Regulation of private bureaus (% of countries)

In force

Under development

Figure 26: Growing regulation of Private Credit Bureaus

Regulation of private bureaus (% of countries)



institutions. Consequently, private credit reporting could be established whenever the credit industry

decides to proceed, by applying standard solutions from other markets.

Banking Law clearly establishes the authority of the CBY to request credit information from supervised

entities, i.e. banks. The latter must periodically contribute data to the PCR. Article 28 Paragraph 1 clearly

mentions that: “..all banks shall submit monthly statements to the CBY no later than the 15th of each

month…indicating their assets and liabilities…together with a breakdown of the position of loans, discounted

drafts and their assets…on the last day of the previous month…”

The mandatory character of this contribution is reinforced by Article 25 which establishes what

information must be contributed and when. Further to Paragraph 1: “…all banks and other financial

institutions recognized by the Central Bank shall submit a monthly report indicating the following:

Balance of credit provided.

A list of loans and facilities of YER 10,000,00050

and greater, with recipient’s name, maturity date

and collateral provided.

A list of overdue loans that have not been paid for more than 90 days and the amounts of

overdue payments”.

Another effect of this article is to enlarge the provisions to “other financial institutions recognized by the

Central Bank” which, if the law is interpreted in a flexible manner, can make the participation of

microfinance institutions possible and easier.

Though the information requested by law, is limited to the above categories, the law gives an unrestricted

power to the Central Bank (Article 28 Paragraph 2) to require any information, from any bank, hence

providing the opportunity, as an example, to reduce the threshold on loan amounts and request

consumers’ loan data.

Furthermore, CBY is mandated to compile information under the form of aggregated data.

Article 25, Paragraph 2, indicates that “… the Central Bank shall prepare a combined statement

of the credit facilities provided…without mentioning the name of the bank providing such

information…”.

This is reinforced by the contents of Article 28, Paragraph 3 which states that: “…the Central

Bank shall be responsible for the compilation of consolidated data combining the figures given in

the statements submitted under Paragraph 1 of same article…”

The law also clearly authorizes the dissemination of the compiled information from the Central Bank to

the supervised financial institutions; however, it places some limits and boundaries for disseminating the

data to lenders and other third parties, as indicated below:

50

This threshold has been gradually decreased and no longer applies.



Article 25, Paragraph 3, states: “…All banks and institutions recognized by the Central Bank shall

have the right to review the combined statement on any customers requesting credit facilities

from them…”

Paragraph 4 states that “…the Central Bank may distribute monthly to all banks the list compiled

under the provisions of Paragraph 1 indicating customers with credit facilities of more than YER

10 million, that are in arrears for more than 90 days…”.

Some conflict seems to arise with Article 28 Paragraph 3, when the law states that: “…figures

incorporated into the detailed statements (prepared by CBY) shall be considered confidential

information restricted to each individual bank and the CBY…”.

The above provisions, if taken in isolation, seem to exclude the dissemination of positive information

limiting it to negative data only. In addition, apparently, it seems not to allow sharing of information among

a pool of lenders, but it restricts it to an individual relation between the Central Bank and each individual

bank.

Nevertheless, the law introduces one important exception that represents a definitive solution to the

above issues, and allows full sharing of complete information, both positive and negative, which is non-

fragmented from/to any supervised entity recognized by the CBY, dependant on the consent of the

borrower/consumers.

In fact, Article 84, Paragraph 2, clearly establishes that: “…the Central Bank may publish completely or in

part at such times it sees fit, any information or data supplied to it pursuant the provisions of this law, on

the condition that it publishes no information or data revealing the private affairs of any particular bank or

customers of a bank without the prior agreement in writing of the party concerned”.

Moreover, the law establishes in the same Paragraph 2 of Article 84 that consent is not required for all

loans exceeding the old threshold of YER 10,000,000 (subsequently reduced to YER 500,000). A

possible limitation could be the need to have both the consent of the borrower and of the bank (party

concerned) before sharing data below this threshold.

In conclusion, as long as the consent of the borrower (prior, open, written, full, and part of the credit

application) is systematically requested, the CBY and the Yemeni lenders should encounter no problems

in sharing full information on borrowers without any limitation, as is the practice with the new PCR.

Thus, based on the same principle (prior, compulsory borrower consent granted with any loan agreement)

it appears possible that private information sharing schemes, such as PCBs, could also be started among

regulated and non-regulated entities as well. In fact, this solution has been implemented in other financial

markets where credit reporting is not governed by specific legislation or regulations yet, but is purely

based on simple borrowers’ consent, allowing lenders to share data and to make inquiries through third

party agencies, i.e. PCBs. Having said that, more in depth research and analysis are required to



BOX 6: Need for a Legal Framework

The final objective of the regulators in Yemen

should be the establishment of an appropriate

legal and regulatory framework without which the

development of a credit information industry will

be slow, particularly if considering the

establishment of PCBs. In the long run, the

absence of clear legislation can create

uncertainty for potential information providers,

end-users, individuals and authorities, and also

lead to a disorderly situation in the marketplace.

unambiguously establish the power of this norm in Yemen, and the advice of a local reputed legal firm

should be requested before any private information sharing system is considered.

A consent model solves the confidentiality concerns present in the lending system as it supersedes bank

secrecy. Borrowers’ consent is a mechanism that puts power of information in the hands of the subject of

information, permitting them to decide whether the sharing is in their interest or not. Most bank secrecy

laws are superseded by the borrower’s consent and this permits lenders to share customer information

with third parties, if the consent is present. Relevant importance should therefore be given to the

necessity of always collecting a written, open borrowers’ consent. This clause should be embedded in all

credit applications, and requested with generalized and simultaneous procedures by all lenders.

The possibility to increase participation of non-regulated MFIs in the PCR should be considered. This

could be achieved through the potential relaxation of general rules, introduced by Article 25, Paragraph 1,

regarding the possibility for “other finance institutions recognized by the CBY” to share information (with

borrower consent). This could represent an important change allowing data sharing amongst all lenders.

The main purpose of these norms would be to enable

a legal and regulatory framework that covers all

aspects from licensing to operations, shareholding

pattern, governance, data collections, security of data,

permissible purposes, etc. The legislation should

harmonize the interests of the individuals, the

intermediaries, the databases, and the users of the

information. Above all, individuals should possess a

guarantee to their privacy rights and accuracy of the

information, as well as the proper use of their

information.

The Law of the CBY (n. 14 of 2000) reinforces the contents of the Banking Law with the following norms:

Article 45, Paragraph 1: “…Any bank or specified financial institution shall provide the Central

Bank…with any information or statements it requires…”

Article 45, Paragraph 2: “…the Bank may publish…the information provided pursuant in Paragraph

1…it shall not however publish any information revealing the financial situation of any client, bank or

specified financial institution, unless it receives prior consent in writing…”.

Article 45, Paragraph 3, establishes that not providing data is a violation and Article 46, Paragraph 2,

quantifies the penalties.

In no place, other than a reference in Article 13, Paragraph 5, (“…the Board shall have the following

particular duties and responsibilities…approving all regulations, guidelines, and instructions that are to be



issued by the Bank…”) is the Central Bank empowered to issue specific regulations like the one

necessary to establish Private Credit Reporting in the country (e.g. license, supervise PCB).

CBY has issued credit reporting regulations (n. 28877 of April 2000; n. 54064 - 55858 - 58912 of July 2006;

n. 26222 of April 2007; n. 42589 of June 2008; n. 28282 - 28270 of March 2009; n. 25000 - 25429 - 25579

of April 2009; and n. 34746 of May 2009) making the following mandatory:

i) the request of borrowers’ consent (part of the credit agreement).

ii) the enforcement of consumer’s rights to request their own information.

iii) the elimination of the threshold (YER 500,000) and the sharing of all information.

iv) the provision of all information on all loans and all customers (including retail and MFI banks’ loans)

as of June 2009, within certain deadlines and in specific format and contents.

v) the lenders’ mandatory inquiry to the PCR before granting any type of credit.

These regulations reinforce the contents of the current jurisprudence (Articles 45 and 46 of CBY Law) and

request lenders to adhere to basic norms to facilitate the deployment of an effective credit reporting

system and form the basis for a future private sharing scheme. Lenders should be required to fully comply

with the above instructions through periodical audits and applying sanctions where appropriate.

It is paramount that any legal and regulatory credit reporting framework in place provides consumers with

specific tools to manage and protect their participation in the credit reporting system. Unfortunately, these

are not in place in Yemen. Therefore, the following specific items should be explicitly addressed in the

rules and regulations dealing with credit reporting activities and/or related consumer protection:

i) The consumer protection rules for credit information registries should be clearly specified. This protection

should be equal for both the public and private credit registries. There is neither a specific authority in

Yemen, today, dealing with complaints on data privacy, nor exists a regulatory framework or specific

procedures and processes to deal with complaints related to credit reporting activities apart from CBY’s

regulation.

ii) Consumers and firms should have free access to their own credit reports at least once a year, and also in

case of dispute and adverse action. It is generally recognized by the credit reporting industry that

consumers are in the best position and have the strongest incentive to assess the accuracy and

completeness of the data contained in their credit reports.

iii) They should also be given the right to obtain a free report from the lender or the PCB, in all these cases.

Notification should include specific instructions on how to obtain their credit report (free of charge) and

consumers’ rights with respect to challenging information they believe to be inaccurate or complete.

iv) Consumers should compulsorily be notified when an adverse action (e.g. denial of credit, refusal to

renew a credit line, etc.) has been taken as a result of information contained in their credit report,

regardless of the source of information (public or private registry).

v) Clear procedures, deadlines, and responsibilities of lenders and credit registries, in dealing with

consumers’ complaints should be established. Time limits should be unequivocally indicated and applied.



BOX 7: Borrowers Consent

The immediate implementation of borrowers’

consent clause will allow utilization of historical

information when a PCB is established. This will

facilitate the development of the PCB and also

make the exchange of historical data between

CBY and a new PCB possible.

Also, a fast mechanism for disputing and correcting wrong or false data should be immediately available

for consumers.

4.3 BORROWERS’ CONSENT

Borrowers’ consent to share data with and inquire into

PCR/PCB is not always requested by all the lenders in

Yemen, despite the requirements of Law.51

. This is

possibly due to the limited number of loans and the

culture of freely and legally sharing loan information

above the threshold of YER 10,000,000 (for which the

law does not require consent). But the scarce availability of credit to consumers, lack of an established

data privacy culture among lenders and consumers, and lack of awareness about the importance that

consumer consent can play in establishing a sufficiently reliable regulatory framework for credit reporting,

do play an important role in the scarce consideration given to borrowers’ consent by the banking system.

MFIs generally do not require this authorization from the customer. Even when consent is collected by

lenders, it is restricted to data sharing with the CBY only, and is not an open consent 52

which would allow

data sharing with third parties, i.e. PCBs.

Lack of borrowers’ consent on loan agreements, may impede the creation of a large PCB database,

preempt the utilization of payment performance data, return a very low hit-ratio, diminish the initial efficacy

of a future PCB, and delay the development of value added services. Though today consent may not

seem a crucial issue, it will become a vital necessity for inquiries on individual customers in the future.

The Banking Law is clear; consumer information can be shared only in the presence of consent.

4.4 NATIONAL IDENTIFICATION NUMBER

An effective electronic identification system, the new NID, has been established and extended to all citizens

who must request the new National ID card after completion of 16 years of age. The NID is composed of 11

digits (the first 3 digits indicate the governorate; the 4th digit indicates the sex, while the remaining 7 digits are

a serial number given centrally). No check digit is part of the NID. This identification system is a crucial asset

for the development of efficient credit reporting systems; both public and private, and an excellent foundation

for building a reliable and homogeneous database.

However, inquiries transmitted to the PCR do not consistently contain the NID number. Several pieces of

identification are used by banks as a component of the search key. This creates inconsistencies in the data

and produces extra work for PCR staff.

51

Law 38 of 1998, Banking Law, Article 84.2 and the subsequent CBY regulation n. 58912 of 22nd

July 2006, and 25579 of 28th April

2009 52

Written borrowers’ consent given to the lender to share data with any third party or lender, and not only with one party (e.g. with the CBY only).



5. CONCLUSIONS

5.1. A STRATEGY TO ENHANCE YEMEN’S NATIONAL CREDIT

REPORTING SYSTEM

International experience has proven that the lack of a strategic approach to solve financial infrastructure

issues not only negatively influences the success of individual projects underway but also affects the quality

of the financial infrastructure to the detriment of the economy. If common strategies among the public and the

private sector are not defined and agreed, credit reporting systems may, at best, only achieve a fraction of the

results to achieve an overall national objective.

The scope and complexity of developing and successfully implementing a strategy for credit reporting

systems modernization should not be underestimated. Credit reporting systems involve a broad spectrum of

public and private stakeholders, especially when they include retailers and utilities data in addition to the

banks / financial institutions data. Thus, a credit reporting reform agenda should include stakeholders such as

consumer protection agencies, information providers, public sector entities, lenders, and banking supervisors.

Consensus on a strategic approach is crucial to develop a holistic view of all aspects of the nation’s credit

reporting system needs, and the possibility to satisfy them in an orderly and cost-efficient manner. A

collaborative approach, with the active participation of all stakeholders, is always desirable because of the

complexity of the required changes. The inputs given by service providers, users, technology partners,

legal experts, as well as a well-structured collaborative approach will create synergy, stimulate learning

and provide a basis for optimizing benefits through cooperation and consensus building.

In Yemen, the most visible and important development is the revamp of the PCR which is an indispensable

tool for credit risk management and evaluation. The enhancement has triggered the formal sharing of positive

credit information, including small ticket loans. At present, only banks are part of the sharing mechanism. The

revamp of the PCR, however, is on-going. Therefore, the positive impact has not been fully realized.

There are clear symptoms of a market where information flows are not fully effective and complete. These

include high reliance on guarantees/collateral, low credit penetration, high NPL’s, uniform interest rates not

based on individual risk, conventional risk management procedures, manual subjective decisions, crowded

decision committees, and the absence of real competition among lenders.

Furthermore, it must be considered, that in the future, other lending sectors will most probably play an

increasingly relevant role in the credit system. In the short-term, it is recommended that the current PCR

system is enhanced to accommodate the immediate needs of the lending industry. For the medium to long

term, a solution that relies on establishing a PCB should be envisaged. The PCB should be tasked to create

a private credit reporting system, totally financed, operated and managed by the private sector, thereby

reducing the massive financial and operational burden on CBY, and allowing the CBY to focus on supervision



BOX 8: PCR’s Role in the Future

Lending institutions and CBY will benefit from the

existence of a private reporting system by getting

all the information required for supervisory and

credit assessment purposes. Without considering

that the PCR may become both the biggest

competitor of potential PCBs and the most

significant obstacle to the development of a

competitive and open information sharing

industry in Yemen, unless the implementation of

the above strategy is considered.

of the credit system.

In the medium term, the CBY’s objectives should be to:

- support the establishment of an advanced, private, integrated full-file information sharing system.

- eliminate legal constraints that may exist for the creation of a PCB.

- enforce an appropriate legal / regulatory framework.

- delegate to the private sector the service of information provision to lenders.

- continue to collect data from regulated financial entities for internal purposes and tasks.

- close the PCR to lenders’ inquiries.

- become the Supervising Authority of the PCBs based on the powers to be given to CBY under the

new regulatory framework.

In conclusion, the CBY should consider the existing

PCR as an important, preparatory step in a phased

strategy towards the development of a state-of-the-

art PCB System in Yemen.

To recap, for establishing an effectively functioning

information sharing system in Yemen, a strategy

marked by the following milestones could be

pursued:

Begin working, together with the lending

community and other stakeholders, towards the establishment and utilization of an effective national

credit reporting infrastructure that will become a vital prerequisite for responsible and reliable credit

granting.

The chosen final solution should allow the exchange of all positive and negative credit information (full

sharing system) among regulated financial entities to start, but open to eventually contemplate the

future participation of other lending sectors, non-regulated as well (non-fragmented system).

Different information sharing schemes/solutions (e.g. public / private) may be adopted, in different

phases though it is advisable that it is the private sector that operates the credit reporting system, as

amply demonstrated by international best practice results.

Given the size of its population and potential market, Yemen may be in a position to attract specialized

providers in the future - should its credit industry continue achieving a steady growth. However, this will

take place when credit volume growth can justify the significant investment required, to develop a PCB,

i.e. the presence of a solid legal environment, a culture of information sharing among borrowers/

lenders, and sufficient historical information available in the PCB’s database.

Three to five years is a reasonable time span for the above development. In the meantime, it will be the

CBY through its PCR that will serve the information sharing and credit reporting needs of lenders.

Therefore, it is advisable that a staggered approach to full credit reporting is followed, with an initial

step (Phase 1) in which the CBY continues to be the provider of information to the credit industry,



enlarging its scope to the microfinance sector as well.

In parallel, a strategy second step (Phase 2) must be planned to attract private information providers in

the medium-long term, allowing the definitive hand-over of information provided from the public to the

private sector.

Regulators should consequently continue to pursue their existing plans to upgrade the Public Credit

Registry. Information impact will not be limited to support lenders’ risk assessment, but exhaustive and

first rate information will also be required by the regulators for supervision, monetary policy definition,

statistical purposes, and existing international reporting commitments.

In Phase 2, the establishment of an efficient and modern Private Credit Bureau should be fostered,

allowing regulators to delegate the considerable task of becoming a specialized information provider,

which is not part of its institutional role/responsibility, and which could create unjustifiable operational

and financial burdens to the CBY with regards to investments, structure, staffing, and relations with the

borrowers.

If possible, more than one PCB should be licensed, to avoid the establishment of an inefficient

monopolistic information industry. Upon establishment of the PCBs, it would be desirable that

regulations confirm the rules for lenders to: i) share information with PCBs, and ii) inquire from PCBs

before granting credit - always with borrower’s consent.

In addition, the PCR should be closed to lenders inquiries. Lenders would then have to automatically

switch to and consult the existing PCBs53

. However, the PCR should continue to collect full information

from the lenders and utilize it for the CBY’s internal purposes only.

The role of regulators in respect of PCBs and credit reporting would remain nevertheless crucial,

qualitatively more important, and determinant for the establishment of a sound, solid, reliable

information sharing system. In fact, the CBY should be the authority delegated to grant licenses, to

regulate and to supervise PCBs with a particular inclination to the protection of borrowers’ rights, while

monitoring that the sharing and dissemination of the information comply with the existing legislation

and norms.

A friendly and clear legal framework must be in place in order to give CBY effective tools to exert the

above role, but also with the objective of eradicate any impediment to a complete sharing of

information, therefore attracting foreign investment and skilled technical information providers, while

granting full privacy and protection to consumers.

Legal framework should also regulate and set guidelines for PCBs licensing and operations, consider

the minimum security standards, the data exchange responsibilities, consumer rights, the

responsibilities of PCBs and lenders, as well as eventual sanctions for violations.

Regulators should already begin to work towards enabling a sound and bespoke legal framework

clarifying the rights and/or obligations of credit information providers, users, consumers, and authorities

alike.

To facilitate the above tasks, the involvement of the YAB and the SFD is paramount, as it would allow

the CBY to deal with strong reliable partners, facilitating the decision making process and permitting

53 While the PCB/s would be able to develop and provide Value Added Services, as well as the most upgraded security systems and standards, (thanks to specific expertise, international experience, and to the vast global investment made in the credit information sector worldwide) this would be extremely difficult for the CBY, as for any Central Bank worldwide



adherence to the general international credit industry standards.

In parallel, the diffusion of advanced credit and payment systems becomes of fundamental importance

to stimulate consumer credit. The utilization of plastic money and basic credit products, through pilot

projects with large inclusion, is one of the most effective and fastest ways to improve penetration of

new credit services, increase their utilization and appreciation, while fostering a faster propagation of a

new credit and credit information culture among consumers.

To complement, lenders should robustly invest in internal training programs, building capacity on new

risk management and up to date portfolio monitoring solutions (credit bureaus, credit scoring, scoring

monitoring, etc.). Financial education should be extended to consumers, aiming at nurturing a deeper

understanding of credit, credit products, credit concepts, credit information, and consumer rights.

Finally, it is recommended that the Credit Bureau Working Group is created with the objective to outline

the strategy for the establishment of the future national Credit Reporting System, stimulating local

interests and providing a basis for discussion with key Yemenite stakeholders, donors, international

agencies, and multilateral organizations, and facilitating the agreements on a number of policies, legal,

organizational, technical and operational issues, to strengthen the PCR activities in Phase 1 (PCR) and

envisage the components of the potential Phase 2 (PCB).

5.2 COMPARING EXISTING AND IDEAL CREDIT REPORTING MODELS

The following table emphasizes the major differences between the current PCR exchange of information and

a standard PCB built on best practices.

Table 16: Differences between PCR exchange of information and PCB

Relevant Aspects

CBY PCR (current situation)

STANDARD PCB (future potential)

Information providers

Only regulated entities (currently only banks) No retailers No credit cards No Micro credit institutions non-regulated No mobile telephone companies No utilities

The system is generally characterized by a multi-sector sharing platform that can be fed by banks, MFIs, NBFIs, and ultimately by each and every other regulated and/or non-regulated sources/users, either public or private, financial or commercial

Information contributed

Basic portfolio outstanding figures on business firms and some consumers

Lenders forced by Code of Conduct and “reciprocity principle” to share all information, on all types of loan, on all customers

Data returned to lenders

Aggregated, limited, partial

A PCB generally disseminates all information on all types of loans, on all customers, under a detailed format at a single account level (trade lines), including previous payment pattern, previous searches list, history of arrears, worst arrears, total arrears, etc.

Historical data No historical data returned A PCB, complying with local legislation, generally shares the last 3-5 years of full historical payment performance

Duties and responsibilities of users /data providers

No legal/administrative responsibility concerning the quality and quantity of the information shared No Code Of Conduct enforced No sanctions applied

Accountability for data quality and completeness Reciprocity principle enforced Penalties applied in case of misconduct and non compliance Code of Conduct enforced Possibility of service suspension Possibility of revoking service

Value added services

No internal capacity and skills to develop Value Added Services

Know-how, and international experience, vast capacity to develop sophisticated services (scores, tracing systems, fraud



Table 16: Differences between PCR exchange of information and PCB

Relevant Aspects

CBY PCR (current situation)

STANDARD PCB (future potential)

systems, etc.)

Internal capacity / training

Relatively limited expertise Limited training possibilities

Internal capacity building to run the PCB in parallel with maintenance, support, training as a result of international expertise and know how

Support to consumers

Limited capacity/possibility to support a massive number of consumers complaints No dedicated unit/department

A PCB must set-up an operational internal Consumers Support Unit (CSU) Toll-free telephone number to be implemented Web-site to be implemented

Consumers / borrowers rights

Consent necessary to share data, not always requested Access to personal data allowed but difficult to do Right to dispute and correct the data allowed but difficult to do No possibility to recur against PCR through a specific authority Lenders’ utilization of data for purposes not permitted by the law is unmonitored

Borrowers’ consent to share data and inquire the PCB mandated by law Right of borrowers to obtain a free credit report once a year Right of consumer to dispute information contained in the PCR and to have it corrected, if proved wrong, within enforced deadlines Lenders obligation to reply to borrowers’ requests within the established deadline in case of dispute Central Bank’s paramount role in ultimately ensuring that consumers’ rights are respected by lenders Financial literacy campaigns among borrowers, about their rights, promoted by the PCB Routine Central Bank’s supervision and audits over quality and integrity of data, security, compliance with the law performed by the authorities Utilization of data only for permissible purposes monitored Sanctions applied in case of non compliance

5.3. INTERACTION WITH PAYMENTS SYSTEMS

Effective interrelations between payment systems and credit reporting operators are both instrumental to

enhance the reliability of payment instruments and to improve the quantity and quality of the data

managed by credit registries. The use of electronic payment instruments, which can capture relevant

information on the repayment of commercial and financial obligations, can support credit information

systems to further differentiate good from bad repayment behaviors.

As a matter of fact, in Yemen, the Credit Registry could already be storing some information derived from

payment systems, like information on rejected checks, and possibly some information from corporate credit

cards, or checking overdraft accounts operated with ATM cards. This data may become relevant in the future

and should be maintained since it can be used to determine clients’ payment behavior.

In Yemen, the symbiosis between credit reporting and payment systems is not effective as yet, owing to

some cultural, technical and logistical challenges. Among these are:

i. the still limited acceptance of a “borrowing culture” among average consumers;

ii. the scarce penetration of advanced payment systems (not only advanced electronic/plastic

money like credit cards and debit cards, but also the more unsophisticated checks);

iii. the still insufficient territorial coverage offered by the banking system which holds the financial



inclusion of more potential consumers as well as the larger diffusion of credit;

iv. the insufficient ATM network and the negligible P.O.S. system coverage, not yet adequate to

support a massive diffusion of electronic payment systems (and on the way to fragmentation,

should the banks decide to opt for separate networks); and

v. the absence of pilot projects to massively introduce electronic payments systems to replace cash

(also facilitating comprehension of new financial instruments); and cumbersome procedures to

open new bank branches.

Based on the experience of how other credit markets have developed (particularly in Latin America and

South East Asia), it is possible to outline the evolutionary stages and changes that, in the medium-long term,

the credit industry might undergo. ATM, debit and credit cards, and P.O.S. will start to gradually become part

of the daily life of the Yemenite customer. These innovations, combined with the new risk management

technology that some financial institutions are timidly starting to implement (and that will become ever more

mature with the availability of complete credit information), will considerably change the way lenders grant

credit today, as well as influence and alter consumer attitudes towards credit and new payment systems.

i) A first phase of change will be characterized by the growing penetration and utilization of the on-

line ATM/POS. Cardholders will progressively shift from the conventional cash/checks methods

and increasingly pay their purchases electronically. Consumers will start to use multifunctional

debit cards to withdraw money and purchase goods with cash, and when an adequate network is

established, they will pay with the card at the P.O.S.

ii) Gradually, the needs, the demands, and the likings of the clientele will be automatically re-

oriented towards more advanced payment methodologies. The magnitude of this evolution should

be fully appreciated as well as its benefits for the system. World Bank’s research shows that the

financial impact of the full shift from a cash oriented payment system to an electronic system may

be estimated in a 0.5% to 1% GDP growth.

iii) A further stage will be the gradual migration from payment cards to revolving credit cards. Credit

cards, today a negligible presence in the financial services panorama (some lenders claim that

the only obstacle to launch real revolving credit cards is the lack of complete information on

consumers), will start to irreversibly and permanently represent the industry standard, forcing the

less proactive banks to go after innovators and clients’ demand.

iv) Retailers, non-regulated, non-financial, commercial lenders will start competing with the banks

(as it has happened in most countries) offering credit directly, and avoiding the banks’

intermediation, particularly in the lower segments of consumers, thereby acquiring a significant

share of the retail credit market.

v) This will prompt the need for upgraded technological and informational infrastructure, as well as

for state-of-the-art risk management techniques and skills that today are not commonly

developed yet within the banking system. The introduction of credit scoring models and related

technologies (monitoring, account management, collection strategies, etc.) will become

indispensable for managing the risk of retail and SME portfolios.



vi) Instant credit as a result of the utilization of automation, credit bureau data and scoring will

become a competitive advantage.

vii) An even stronger force that will ultimately push the transformation of consumer credit from

traditional products (e.g. personal loans) towards plastic money will come from the Internet and

from online banking. In fact, e-commerce will be the successive phase of credit evolution which

traditional lenders will have to cope with, and which they will have to plan for, with serious

advance.

viii) One of the important repercussions of the new condition will be the fall of collateral dominance,

especially for retail and other small ticket loans. The new credit products and portfolios will be

managed with more advanced, automated procedures and tools, with lesser necessity of

collateral and with the transformation of today’s nearly completely secured credit portfolios into

increasingly unsecured portfolios.

ix) In the medium to long term, credit, as it is known today will cease, and customers will use their

revolving credit lines to buy goods and services online (travel and flights, books, mobile phone

services, movies, music, etc – without any intermediaries.

x) The future of credit will then go beyond traditional channels. A new payment system will emerge,

i.e. mobile telephones. It is estimated that the volume of mobile phone payments globally

increased from $ 3.2 billion (2007) to $37 billion (2008)54

.

xi) Remittances and payments are already made through mobile phones, without any physical

transfer of money. The social and business impact of this new technology and payment system

can be dramatic. Cash, to start with, will be replaced by mobile phone payments. Small shopping,

short commuting and entertainment will be particularly impacted, followed by the replacement of

other small payments currently being made with plastic money.

xii) While distribution and payment systems have traditionally been controlled by banks, mobile

telecom operators will be in the virtual position to consider becoming financiers themselves (this

is starting to happen in other markets). Needless to say the traditional lenders, i.e. the banking

sector will be impacted the most as a result.

xiii) This may be considered one of the

biggest financial evolutions. The vast

majority of the worlds 4 billion mobile

phones are already operational, and

mainly in the hands of the poorer

segments of the world population.

Experiments are under way in many

emerging markets (e.g. Kenya, South

Africa, Philippines) to start using mobile

phones for simple, non-intermediated

credit and payments.

54

The Economist, February 17, 2007. American consumers carry with them mobile phones, twice as much as cash or credit cards. This proportion is four times higher among younger consumers aged 18-34, and decidedly higher in developing markets.

43

0

500

1,000

1,500

2,000

2,500

000s

Western

Union

Bank

branches

Post

offices

ATMs ETFPOS

Source: WB 2005; VISA; UPU 2005

25m

4bn

Figure 27: Mobile Telephones: A new payment system in

the hands of the poor



Some quick-win actions may promote a broader coverage of the territory and increase the penetration of

financial services in the less serviced regions of the country and in rural areas. While opening new

branches and enlarging the network is a lengthy and capital intensive process, interesting alternatives are

offered by:

i. Banking correspondent agent’s network or “branchless banking”. This is a tested system that

dramatically increased the availability of financial systems in Peru, Brazil and whose feasibility is

currently being examined for introduction in other countries. In a nutshell, basic financial services,

like payments, savings, and small loans can be offered through banks’ franchisees (e.g.

pharmacies, post offices, supermarkets that are generally present even in small villages55

).

ii. Balancing the branch expansion strategy of the banking sector. In some countries, for example

India- banking regulators ask financial institutions willing to open new branches in the more

populated, commercial, profitable centers to also open a proportional number of branches in rural

areas and less serviced/covered regions.

iii. Mobile banking technology56

. Pilot projects - the introduction of simple credit products, based on

plastic money and similar methodology of payments, and targeted to the less affluent and

financially educated segments of consumers, should be considered, being one of the most

effective and fastest ways to improve penetration of new credit/payment services and awareness

among the consumers. As a first step, a program of utilization of debit cards linked to the public

employees’ salary could be extremely effective. There are examples adopted by many countries

(e.g. “conta salario” or salary account in Brazil, Angola, Pakistan, etc.) showing extraordinary

results in terms of higher financial penetration rates and utilization of new services. The Brazilian

“conta salario” is an account that can be fed only by the monthly salary, it is free of charges, and

does not provide account holders with checks. Money can be withdrawn only with a debit card. In

Syria, a significant portion of the active employed population is represented by public employees.

This could represent the pilot segment on which to build an extraordinary, powerful, modernizing

program first step.

In Yemen, a significant portion of the active employed population is represented by public employees.

This could serve as the pilot segment to build a powerful program.

Introducing simple credit products can foster financial utilization and acceptance among lower segments of

customers. In the past few years, some simple and inexpensive financial products have been introduced in

other markets by regulators. These products are changing credit utilization behavior among borrowers and

rapidly enlarging the inclusion of customers previously considered non-bankable. An example is the “Credito

Consignado” or “Consigned Credit” introduced and intensively supported by the Brazilian government a few

55

A more detailed explanation of how the branchless banking agent system performs can be retrieved on the World Bank-CGAP’s

internet site http://technology.cgap.org/2007/10/25/how-do-you-spell-success-with-banking-agents-p-e-r-u/

56 Full details of mobile banking technology and benefits can be found on World Bank- CGAP site www.cgap.org.

http://www.cgap.org/



BOX 9: IMPORTANCE OF ATM/POS NETWORKS

There are also opportunities for improvement in the

efficiency of the ATM network and the terminal base. In

the case of terminals, many merchants are forced to

maintain two systems in order to get around

technological incompatibilities, and there are also

multiple ATM networks. The large banks have

traditionally seen private ATM networks as a

competitive tool, whereas smaller banks have been

more likely to share their networks. In 2003 there were

29 ATM networks operating in the country with more

than 137,000 ATMs, only 38% of which were linked to

an “open” network. A shared network would

substantially reduce costs. For example, at Guarulhos

Airport Sao Paulo, there are ten ATMs from six banks,

about double the requirement if a shared network were

available.

years ago. In this case, small personal loans are granted to salaried people who open a no-fee account (for

instance a Salary Account) with a bank. The monthly installment is deducted directly from the salary and paid

by the employer to the bank. The risk for the bank is minimal; consequently, the applied rate of interest must

be significantly lower than the average, making the loan more affordable and acceptable to a larger portion of

the population. Consigned credit is an effective tool to broaden credit base, while reducing risk in a

developing market. It is frequently used in many countries in MENA. It becomes obsolete when credit

culture/financial education increases, and information sharing plays a major role in identifying borrowers’ risk.

Rationalized ATM networks are important,

when banks establish proprietary ATM

networks not connected among them. This

represents a high cost for the industry which is

normally passed on to the final customers, and

inhibits a larger, cheaper, and friendlier usage

of plastic money. An enlightened example is

represented by the Brazilian payment system,

possibly one of the most expensive credit

industries worldwide in terms of interest, fees

(Box 9)57

.

57

Economist Intelligence Unit, Assessing Payments Systems in Latin America, May 2005



ANNEXES



ANNEX I

WORLD BANK CREDIT REPORTING PRINCIPLES

CREDIT INFORMATION SYSTEMS

A modern credit-based economy requires access to complete, accurate and reliable information

concerning borrowers’ payment histories. Key features of a credit information system should address the

following:

a. Legal framework. The legal environment should not impede and, ideally should provide the

framework for, the creation and operation of effective credit information systems. Libel and

similar laws have the potential of chilling good faith reporting by credit information systems.

While the accuracy of information reported is an important value, credit information systems

should be afforded legal protection sufficient to encourage their activities without eliminating

incentives to maintain high levels of accuracy.

b. Operations. Permissible uses of information from credit information systems should be clearly

circumscribed, especially regarding information about individuals. Measures should be employed

to safeguard information contained in the credit information system. Incentives should exist to

maintain the integrity of the database. The legal system should create incentives for credit

information services to collect and maintain a broad range of information on a significant part of

the population.

c. Public policy. Legal controls on the type of information collected and distributed by credit

information systems can be used to advance public policies. Legal controls on the type of

information collected and distributed by credit information systems may be used to combat certain

types of societal discrimination, such as discrimination based on race, gender, national origin,

marital status, political affiliation, or union membership. There may be public policy reasons to

restrict the ability of credit information services to report negative information beyond a certain

period of time, e.g., five or seven years.

d. Privacy. Subjects of information in credit information systems should be made aware of the

existence of such systems and, in particular, should be notified when information from such

systems is used to made adverse decisions about them. Subjects of information in credit

information systems should be able to access information maintained in the credit information

service about them. Subjects of information in credit information systems should be able to

dispute inaccurate or incomplete information and mechanisms should exist to have such disputes

investigated and have errors corrected.

e. Enforcement/Supervision. One benefit of the establishment of a credit information system is to

permit regulators to assess an institution’s risk exposure, thus giving the institution the tools and

incentives to do it itself. Enforcement systems should provide efficient, inexpensive, transparent

and predictable methods for resolving disputes concerning the operation of credit information

systems. Both non-judicial and judicial enforcement methods should be considered. Sanctions



for violations of laws regulating credit information systems should be sufficiently stringent to

encourage compliance but not so stringent as to discourage operations of such systems.

A modern credit-based economy requires access to complete, accurate and reliable information

concerning borrowers’ payment history. Key features of a credit information system should address the

following. An effective credit information system can be integral to the operation of modern financial

systems. Credit information systems can include a number of functions, including collecting, analyzing,

and distributing information about how consumers and businesses, large and small, handle their credit

obligations. This type of information has proven to be an effective tool for a variety of purposes, including

assessing the risk faced by creditors, as past payment experience is a strong predictor of future

performance. Credit information systems also make it possible to empirically assess, in the form of credit

scoring tools, which factors are most predictive, permitting finely tuned credit decisions. As a result,

creditors can more intelligently assess consumer and business lending decisions, thus promoting the

extension of credit and economic development in the countries in which they operate. Also, creditors are

in a better position to develop numerous credit offerings tailored to the risk presented by borrowers’

unique credit histories. Credit information systems promote competition among lenders, thus reducing

the cost of credit. In fact, such systems can also increase the ability to attract foreign investment capital

by providing foreign creditors a rational basis on which to evaluate credit risk. This regionalization and

globalization of credit granting is further enhanced if consistent or at least transparent information

collection standards are employed.

LEGAL FRAMEWORK

1. Basis for Operation of Credit Information Systems. The legal environment should not impede

and, ideally should provide the framework for, the creation and operation of effective credit

information systems. Establishment and operation of credit information systems may be impeded

or prevented by legal prohibitions or uncertainties concerning the application of laws relating to

the collection, disclosure and use of financial information. For instance, bank secrecy laws may

be perceived to prohibit banks from sharing information about their customers’ accounts and

payment history with a credit information system. The existence of such laws can chill the

creation or operation of credit information systems.

2. Enabling legislation is not required for the development of credit information systems. Many credit

information systems have developed organically so long as laws did not prevent their operation.

Nonetheless, concerns about fair use of information have led to passage of legislation authorizing

and regulating the existence of credit information systems. Passage of such legislation removes

doubt about the legal viability of such entities and by creating greater regulatory certainty may

encourage entrants into the credit information systems marketplace.

3. Liability Protections. Libel and similar laws have the potential of chilling good faith reporting by

credit information systems. While the accuracy of information reported is an important value,



credit information systems should be afforded legal protection sufficient to encourage their

activities without eliminating incentives to maintain high levels of accuracy. There are a number of

potential legal impediments to the development of credit information systems. One of the most

significant is the existence of libel laws, laws that permit legal actions based on false publications

that damage a person's reputation. The information maintained in a credit information system is

of the type likely to damage a person’s or company’s reputation if publicly known. This may

include failure to pay bills or filing bankruptcy.

While credit information systems should be encouraged to maintain high standards of accuracy,

potential exposure to libel actions -- even as a result of inadvertent mistakes -- could discourage

their operation or make them unwilling to report information unless there was no question about

its accuracy. Even with the best intentions, it can be difficult to develop certainty concerning the

accuracy of information being reported. Accordingly, some protection from libel or similar actions

can be critical to the existence of comprehensive credit information systems. Such protections

should not relieve credit information systems from the responsibility to provide reasonably

accurate information. Instead, standards more geared to the challenges of operating a credit

information system should be substituted.

OPERATIONS

1. Use Restrictions. Permissible uses of information from credit information systems should be

clearly circumscribed, especially regarding information about individuals. Credit information

systems collect a wealth of information about individuals and businesses. Much of that

information could have a serious impact on reputations and financial standing. The information

could be used in negative and potentially harmful ways, such as for purposes of blackmail or

referrals to criminal authorities for tax evasion. On the other hand, if the information is used for

legitimate, beneficial purposes, the existence of the credit information system is likely to receive

public acceptance. Legally imposed use restrictions can address these concerns.

2. Data Security. Measures should be employed to safeguard information contained in the credit

information system. To the extent information in credit information systems is sensitive, and to

avoid undermining use restrictions, such systems should employ reasonable methods to protect

the security of such information. As appropriate, these methods may include physical, electronic

and procedural safeguards to protect against improper data access.

3. Credit information services can provide valuable information for assessing repayment risk, likely

profitability of accounts, debt collection, marketing, employment screening, tenant screening,

claims analysis, insurance underwriting, market research, and economic trends. A sound

environment for managing credit and insolvency risk requires reasonable access to accurate,

reliable and current credit information on borrowers that affords adequate protection and

safeguards for the privacy of borrowers and that is governed by general rules of due process.



4. The legal environment should provide a transparent procedure that contains incentives for

gathering and dispensing information. Access should be provided to firms engaged in credit

activities and not limited to particular types of entities, e.g., banks. While there may be arguments

to limit access to firms that furnish information to the credit information service, this could unduly

limit potentially beneficial users, especially firms that are just starting up and may not yet have

significant amounts of information to contribute.

5. Transparency and good corporate governance are the cornerstones of a strong lending system

and corporate sector. Transparency exists when information is assembled and made readily

available to other parties and, when combined with the good behavior of “corporate citizens,”

creates an informed and communicative environment conducive to greater cooperation among all

parties. Transparency and corporate governance are especially important in emerging markets,

which are more sensitive to volatility from external factors. Without transparency, there is a

greater likelihood that loan pricing will not reflect underlying risks, leading to higher interest rates

and other charges.

6. Data Integrity. Incentives should exist to maintain the integrity of the database. Credit

information systems can be used in a variety of ways. Some uses, such as evaluating credit risk,

rely on a database containing historical data on as large a number of potential borrowers as

possible. Other uses may not require that data be maintained for extended periods of time. One

such use can be as a means of collecting past due obligations by encouraging repayment to have

one’s name removed from the list. In that context, it might make sense to remove a debtor’s

name from the database when the obligation has been satisfied. However, if the database is also

to be used to make future risk assessments, removal of that information might encourage

payment of the particular debt at issue, but it would undermine the ability to identify borrowers

who have fallen behind in their payments in the past. If a database is to be used, even in part for

credit risk assessment, there should be incentives in place to keep data in the system even after

that particular creditor’s loans have been repaid.

7. Scope of Data. The legal system should create incentives for credit information services to

collect and maintain a broad range of information on a significant part of the population. Credit

information systems are most effective and enhance risk prediction if they contain data on a large

segment of the population. The more ubiquitous their coverage, the better they can serve

financial institutions in evaluating applicants for credit. Many existing credit systems work

effectively through voluntary contribution of data by creditors who recognize it is in their self-

interest to contribute information on their customers. If voluntary contributions are ineffective in

creating a robust credit information system, legal requirements to report information could be

imposed on creditors. Such requirements could avoid the problem that large incumbent creditors

may choose not to contribute information due to the concern that reporting will facilitate creditors’

competing for their existing customers.



8. There is strong empirical evidence that systems that collect both positive and negative payment

histories permit more accurate risk assessments. Those same systems present the potential of

financial institutions identifying their best customers to competitors, thus discouraging

participation in the system. Alternatives exist to reduce the risk of losing customers, such as not

allowing credit information systems to be used to target specific financial institution’s customers.

However, it should be noted that these alternatives do potentially reduce some of the beneficial

competition that results from increased access to credit information.

9. One means of increasing demand for credit information services would be if creditors, both

consumer and commercial, were expected as part of due diligence on extending credit to

consider the borrower’s credit history. This would serve the dual purpose of improving those

firm’s risk controls and creating a necessary market for credit information systems.

PUBLIC POLICY

1. Collection and Use Restrictions. Legal controls on the type of information collected and

distributed by credit information systems can be used to advance public policies. Control of the

use of information collected by credit information systems, or even controls over the type of

information such systems are permitted to collect, can be used to advance public policy goals.

These public policy goals may often be in tension with the risk assessment functions of credit

information systems. In theory, those systems collect the maximum information they can

efficiently collect and use it to predict risk. If they were not permitted to use certain types of

information, due to public policy concerns, the ability to predict risk based on the available data

could be diminished. There are often public policy judgments made to sacrifice the predictive

value of the data in favor of advancing other social or economic goals.

2. Anti-discrimination. Legal controls on the type of information collected and distributed by credit

information systems may be used to combat certain types of societal discrimination, such as

discrimination based on race, gender, national origin, marital status, political affiliation, or union

membership. There are often legitimate societal values that call for assessment of credit risk,

either individual or business, based solely on prior credit experience, as a method of equalizing

treatment of borrowers. In some cases, this could result in a prohibition on collecting certain

types of information, such as demographic or other data about borrowers that goes beyond their

prior loan payment experience, including gender, marital status, or race. The absence of such

data collection and use restrictions might well enhance the ability to predict risk, such as by

concluding that men pose a greater credit risk than women, or foreigners are more credit worthy

than citizens of a country. However, there may be strongly held societal values calling for equal

treatment regardless of certain characteristics. These values may be deemed worth the economic

costs of reducing the ability to predict risk based on credit information system data. This may

result in prohibitions on collecting or using certain information about borrowers, e.g., race,

gender, etc.



3. Ironically, there is another approach to combating discrimination that is directly at odds with

reducing the collection of information. Rather than excluding information concerning protected

characteristics, in some cases, lenders may be required to collect such data. The data is

collected not for its predictive value but instead to use as a basis for evaluating whether the

financial institution is making decisions based on prohibited characteristics.

4. Obsolescence. There may be public policy reasons to restrict the ability of credit information

services to report negative information beyond a certain period of time, e.g., five or seven years.

Certain types of information in a credit file have the potential of seriously impeding a business’ or

individual’s ability to get credit. One such example is the filing of a bankruptcy petition; another is

a series of loan defaults. The knowledge that an individual or company was forced to resort to

bankruptcy because their obligations exceeded their assets could lead future creditors to decline

to extend them credit. While this is quite rational, the consequence can be the lifetime of

economic destruction for an individual or company. In such cases, the government might find

itself burdened with providing assistance.

5. Yet, in many cases, late payments or even bankruptcy filings are precipitated by causes beyond

an individual’s control, such as a natural disaster, unexpected medical costs, or loss of

employment or a contract. It may not signify a permanent inability to manage financial affairs. As

a result, there can be a desire to allow borrowers who have at one time failed to fulfill their

financial obligation to rebuild their credit histories through subsequent good behavior. A credit

information service could undermine this goal by continuing to report the existence of the

negative information indefinitely. As a result, there may be important policy reasons to prevent

the reporting of certain types of negative information, e.g., late payments, court judgments, tax

liens and bankruptcies, beyond a reasonable period of time, such as five to seven years. By

contrast, there might be other types of negative information, e.g., convictions of serious crimes

that are in society’s interest to report for longer periods of time or even indefinitely. It is possible

to craft regulation of reporting practices by credit information services to address and balance

these policy concerns.

PRIVACY

1. Notice. Subjects of information in credit information systems should be made aware of the

existence of such systems and, in particular, should be notified when information from such

systems is used to made adverse decisions about them. Citizens in a country are often troubled

by the existence of secret, hidden databases that contain information about them, regardless of

whether those databases are maintained by the government or private firms. The legitimacy of

credit information systems will be enhanced, and public apprehension reduced, if there is

transparency concerning their existence and operations.

2. Aside from a general awareness of the existence of such systems, it can be critical to inform data

subjects that information from those systems was used to make adverse decisions about the



subject. It is impossible for databases containing thousands, if not millions, of files from

numerous sources, public and private, to maintain current accurate information about a

population that may have similar or identical identifiers, who do not use their personal identifiers

in a consistent manner in all their interactions, who change identifiers over time (e.g., by getting

married), and who move frequently. If erroneous data from those systems is used to made

adverse decisions about individuals or companies, and the subject is not notified of the source of

the data that led to the adverse decision, the subject will have no opportunity to correct the

misinformation. As a result, the subject will continue to face rejections based on incorrect credit

information system data. Not only is that unfair to the subject, it cast doubts on the operation of

the system. It also means that users of the system will continue to be provided inaccurate data

that will lead to incorrect risk assessments.

3. Notifying subjects that adverse action was taken based on credit information service data can

also be a tool in policing anti-discrimination laws. If data subjects are permitted access to their

information (see below), they can assess whether there are legitimate, non-discriminatory

grounds for the denial. For example, if they have comparable credit standing to other borrowers

who were granted credit, and the only difference between the applicants is gender or race, they

might be able to establish that discrimination has occurred.

4. It would also be possible to structure a credit information system to only collect or use information

with the consent of the data subject. However, giving data subjects control over their inclusion in

the database, as opposed to process rights over the use of their data, risks allowing individuals or

businesses with poor credit to exclude themselves or limit access to their complete credit history.

These are the very people or entities creditors most need risk information about.

5. Access. Subjects of information in credit information systems should be able to access

information maintained in the credit information service about them. Access to data by subjects

can serve a number of important purposes. First, greater transparency about how the database

operates and the type of information maintained can enhance public confidence. Second, only

with access can data subjects who have had adverse action taken against them based on data in

the service, determine whether that data is erroneous. Third, in the case of distressed

enterprises, it can be helpful to have clear laws and procedures that require disclosure of, or

access to, timely and accurate financial information on the distressed enterprise. This can

encourage lending to, investment in or recapitalization of viable distressed enterprises. It also

helps support a broad range of restructuring activities, such as debt write-offs, rescheduling,

restructurings and debt-equity conversions; and provide favorable or neutral tax treatment for

restructurings.

6. In addition, the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems

call for laws that require the provision of relevant information on the debtor that could be

accomplished by a credit information service. In addition, those Principles state that corporate



workouts and restructurings should be supported by an enabling environment that encourages

participants to engage in consensual arrangements designed to restore an enterprise to financial

viability. An enabling environment includes laws and procedures that require disclosure of, or

ensure access to, timely, reliable and accurate financial information on the distressed enterprise;

encourage lending to, investment in or recapitalization of viable financially distressed enterprises;

support a broad range of restructuring activities, such as debt write-offs, rescheduling,

restructurings and debt- equity conversions; and provide favorable or neutral tax treatment for

restructurings. A viable credit information service can advance these goals.

7. Dispute Rights. Subjects of information in credit information systems should be able to dispute

inaccurate or incomplete information and mechanisms should exist to have such disputes

investigated and have errors corrected. It is of limited value to simply make data subjects aware

that erroneous information from a credit information service served as the basis for an adverse

action concerning them. In order to make that information useful, there must be mechanisms in

place, either voluntary or mandated, to have such disputes investigated and, if information turns

out to be erroneous, have the information corrected.

8. There are often timeliness concerns about resolving information disputes, perhaps because a

business needs a financial commitment in order to sign a lease or a consumer wishes to

purchase a new home that will go to another potential buyer if funding cannot be arranged. Thus,

some requirement of timely consideration of disputes may often be critical to making the dispute

right meaningful.

9. Similarly, a cursory review of a dispute, with no real effort to investigate and learn the correct

information, can serve to make dispute rights meaningless. In some cases, the error may be

apparent on its face, such as a date of birth of an infant belonging to a senior citizen. In others,

there may be a need to contact the furnisher of the information to verify its accuracy. Oftentimes

the extent of the investigation will be determined by the nature of the dispute.

ENFORCEMENT/SUPERVISION

1. Supervisory Function. One benefit of the establishment of a credit information system is to

permit regulators to assess an institution’s risk exposure, thus giving the institution the tools and

incentives to do it itself. While the principle focus of credit information systems is to permit

financial institutions to gauge the risk posed by borrowers, those systems provide valuable tools

for regulatory agencies to supervise institutions under their jurisdiction. Credit information

systems permit efficient systematic analysis of a financial institution’s loan portfolio, including its

size, diversity, and risk levels over time.

2. Effective Enforcement Systems. Enforcement systems should provide efficient, inexpensive,

transparent and predictable methods for resolving disputes concerning the operation of credit

information systems. Both non-judicial and judicial enforcement methods should be considered. In



light of the important financial and privacy interests involved in reporting credit information, there

is a need for a mechanism to resolve disputes relating to accuracy and proper disclosure. This

mechanism can exist in the courts, through administrative processes, government oversight, or

self-regulatory organizations.

3. Proportional Penalties. Sanctions for violations of laws regulating credit information systems

should be sufficiently stringent to encourage compliance but not so stringent as to discourage

operations of such systems. While compliance incentives serve a valuable role in maintaining the

integrity of a credit information system, there is a risk of over-deterring conduct by making the

penalties for violations too costly. At the extreme, this could deter operations of such services.



ANNEX II

GLOSSARY

i. Code of Conduct:

The regulatory framework allowing governing the relationships between Private Credit Bureaus,

the data providers, the users, the borrowers, the other bureaus, and the supervisory authority. It

specifies, among other things, policies and procedures of resolving conflicts and borrower

complaints.

ii. Consent:

A written clause signed by the borrower or legal designee explicitly giving consent to:

Sending his data to a credit reporting company

Inquiring about his information and data

Consent may or may not be necessary for institutions (depending on local legal/social

norms or requirements).

iii. Credit bureau:

Such info providers that build up credit files by compiling, retaining, processing and analyzing

personal and credit data relating to the credit positions of borrower of banks and non bank

financial institutions, Telecoms, retailers of goods and services which provide credit. CB provides

users with credit reports and other credit reporting and scoring services while not giving any

recommendations on credit provision.

iv. Credit data:

This includes among others:

Gross amount of loan or credit facility

Outstanding balance

Type of facility

Currency of facility

Due date of facility

Due payments

Pledged collaterals

Any other data that serves the purposes of the credit reporting company.

v. Credit file:

Credit reporting companies compile, retain, and process information about borrowers in credit

files.

vi. Credit file inquiry data:

This includes: Name of User, Activity of User and Date of Inquiry.



vii. Credit registry:

A database of personal and credit information maintained by the Central Bank.

viii. Credit report:

A paper or electronic report produced by the credit reporting company containing some or all of

the data in the credit file of a borrower or a summary thereof.

ix. Credit Scoring:

Modeling technique that uses the information contained in the credit file of a credit applicant to

arrive at a relative score according to statistical principles applied uniformly to all borrowers. The

relative score is meant to predictive the likelihood (odds) that the applicant will become a good or

poor risk customer in the future.

x. Customers/borrowers (data subjects): Individuals or institutions that apply for credit. Their

pertinent information and data are compiled in credit files at the credit reporting company and can

be shared in accordance with either the relevant legislations or the rules in the Code of Conduct.

xi. Database:

An electronic archive containing the credit files of borrowers as compiled from data providers and

retained and processed by the credit reporting company.

xii. Data providers/contributors:

All institutions that provide any form of credit as well as all institutions that have identification

data, credit data or otherwise any information or data that relate to the payment habits of

borrowers. All such institutions are able to provide the credit bureau with information and data in

accordance with the legislation or rules set out in a Code of Conduct.

xiii. Data sources:

One or all of the sources which are legally or consensually allowed to provide data to credit

reporting company. These could be:

Banks

The Credit Registry System at the Central Bank

National ID registry

Mortgage companies

Leasing companies / factoring companies

Insurance companies

Institutions providing credit to micro, small and medium enterprises

Money market companies

Retailers of goods and services that sell in installments

Credit reporting companies



Public records: Civil Registry, Voters Roll, Property Registry, Court records, etc.

Any other institutions in possession of information or data that can serve the purposes of

the credit bureau.

xiv. Data provider information:

Including name, main activity, and address of provider.

xv. Disaster recovery site:

A location that is physically separate from the site of the credit bureau and sufficiently away to be

immune of potential physical threats to the site of bureau. The disaster recovery site would

house a continuously updated copy of all databases of the bureau.

xvi. ID (National):

A unique, definitive national identifier for all national citizens, which never changes.

xvii. Identification data:

For individuals these include:

Name

Nationality

Date of birth

Place of birth

Identity credentials

Current home address

Home address/s of past 3 years

Occupation

Current work address

Work address/s of past 3 years

Name of spouse

Any other data that serves the purposes of the credit reporting company

For institutions these include:

Name

Legal form

Shareholders with more than 10% of paid-in capital

Commercial registration number / commercial registration date

Address

Main activity

Secondary activities

Data on the financial position of the institution

And any other data that serves the purposes of the credit reporting company.



xviii. Negative information:

Information on the failure of borrowers to fulfill their financial obligations on time. This includes

Delays

Irregular payments

Bounced checks

Default

Reschedules

Court orders, foreclosures, “protests” and bankruptcies/liquidations.

xix. Payment performance data:

This is historical information that generally goes back 5 years and reflects the commitment level

of borrower to pay on time.

xx. Positive information:

Information on the timely payment of borrowers.

xxi. Public records data:

Data available in public records such as those in the civil registry, commercial registry, property

registry, national ID and court records.

xxii. Permissible purpose:

The user should have a limited, clear, permissible, purpose to make an enquiry and get a credit

report. Permissible purposes could be:

An authorization through a court order

Considering the provision of credit at the request of a borrower whether it is for the first

time, a credit increase, credit renewal, or a change in credit terms

Considering the acceptance of any form of guarantee to a credit application

Getting a credit score for the credit applicant

Having a written consent from the borrower or legal designee.

xxiii. Reciprocity:

Basic principle of information sharing determining that users may use and see only the same type

of information they share with the other parties.

xxiv. Reporting threshold:

Minimum credit facility above which banks/lenders are obligated to report credit data of borrowers

to the credit bureau.



xxv. Users:

Institutions having a contractual relationship with credit reporting company to request credit files

and other services for permissible purposes. Also borrowers about whom the credit bureau

retains credit files. Credit bureaus are prohibited from providing individual users with information

about others. Individual users, however, can enquire about their own information and data in

accordance with the rules set out in any legislated self enquiry process or Code of Conduct.



ANNEX III

RECAP OF CBY’S REGULATIONS ON CREDIT REPORTING

CIRCULAR NUMBER

CIRCULAR DATE

SUBJECT

28877 26/4/2000

Instructs banks to provide the PCR with data on borrowers who did not fulfill their credit payments (credits over than 5 Million YR and over 90 days delinquency) and inquire the PCR.

54064 2/7/2006

With regards to the PCR banks are mandated to: - do not grant credit to any customer before consulting the

credit registry - do not grant credit to any customer before getting an

identifier from the credit registry - do not grant credit to any customer before ensuring that he

is not on the notification list (previous circular) - include the following information in the request, to allow the

creation of a search key: Id, Address, City, date of Birth

55858 8/7/2006

Setting up the specifications of the credit registry and in particular the reduction of the threshold to YER 500,000 (from YER 10,000,000). The deadline to provide the PCR with the data is set to the 5

th day after the end of each month.

58912 22/7/2006 Banks are asked to always request customers’ consent (provided with the circular) as a mandatory piece of the credit file.

26222 9/4/2007

Reminder to the banks regarding their obligations stated in the circular 28877 (26/4/2000) related to inserting and retrieving customers into/from the credit registry, before granting credit.

42589 21/6/2008

Reminder to the banks regarding their obligations stated in the circulars 54064 (2/7/2006) and 55858 (8/7/2006). Models to inquiry for corporate and individuals are attached to the circular. The banks are requested to use the National ID.

28282 28/3/2009

The banks are authorized to show customers their credit reports received from the credit registry. Customers have the right to get all their credit information from the banks they are dealing with.

28270 28/3/2009

Information about the initiative of the CBY to install a new credit registry (from UAE) supporting on-line exchange of data. (Required: Internet Line).



CIRCULAR NUMBER

CIRCULAR DATE

SUBJECT

25429 21/4/2009

The banks are mandated to: - enter the data regarding their newly approved customers

according to the new structure/layout of the new system before 30/6/2009

- during the month of July 2009 banks must add all of their records/customers information and update the credit lines recording the position of 30/6/2009

- Inquiry will continue until 31/7/2009 in the OLD system - Starting 1/8/2009, the banks can perform their inquiries in

the new system. The position recorded will be as the one on 30/6/2009.

- Banks must update their customers’ positions on a daily basis.

25000 21/4/2009

The circular lists the information required in the NEW system/format, like name (English, Arabic), National Id, type of credits, etc.

25579 28/4/2009

Reminder to the banks regarding the use of the consent clause (circular 58912 of 22/7/2006).

- This consent is a part of the credit contract - The customer needs to sign the consent as part of the

contract documents.

34746 25/5/2009

Banks are reminded to: - complete data provisions according to the deadline set

for this operation in the circular 25429 of 21/4/2009 - start providing data on credits with amount lower than the

existing threshold (YER500,000).

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