Tough times for banks in Yemen

'The courts are weak,' says Ahmed Al-Hamdani, chairman of Watani Bank. 'They almost don't exist. They have very low standards, and if we get our money back, it takes an awfully long time, maybe as long as 10 years.' As a result, at the end of the first quarter of this year, the loan-to-deposit ratio for Yemen's banking sector amounted to just over 30 percent, an extremely poor figure.

Yemeni banks have also ignored the global trend of paying more attention to retail banking. Products and services have been hard to find, and as one local economist says, 'Yemeni banks have always been warehouses. People just park their money in the banks.'

With hardly any lending and few products to sell, Yemen's banks have been left dependent mostly on letters of credit, letters of guarantee and buying up Yemeni T-bills if they ever hope to make money.

To make matters worse, two foreign heavyweights working in Yemen have been the biggest players in the market. At the end of 2001, Arab Bank, based in Amman, led the sector in terms of deposits ($358 million out of $1.8 billion for the whole sector), followed by the French giant Crédit Agricole Indosuez ($329 million). The key to attracting Yemeni customers has been these banks brand names and the safety they imply, invaluable assets in the country.

Yemen is full of uncertainties: the last civil war took place only seven years ago, and there is vast lawless terrain in Yemen with tribal clashes happening weekly. Customers have felt that the safest place to put their money is in large international banks, and Arab Bank has had an advantage of being the only financial institution offering a wide range of services.

It has been the only provider of ATMs (seven in five cities), is the leader in the credit card business and offers phone banking.
But some of the leading Yemeni banks have recently woken up to reality. Their new strategy is to get into retail banking to help offset their limits in lending by building on their fee-based income. They also believe that this might help them grab a bigger share of the market.

The initiator was Yemen Gulf Bank. Opening up shop in Yemen last year, it came on the scene with one objective: focus mostly on products and services while being a step ahead of its competitors. 'The banking sector in Yemen is very competitive, so our aim is to develop services in our bank,' says Mohamed Al-Zubieri, chairman of Yemen Gulf Bank. 'We fully believe in non-interest income coming from retail services, so we will continue to offer more products and services, which will attract more customers.'

So far this year, Yemen Gulf Bank has become the first bank in Yemen to offer online and mobile phone banking. Its online banking services include customers checking their balances, ordering checks, transferring money from one account to another within the bank and arranging for the bank to pay their bills.
Phone home.

'It's a complete package of Internet banking,' says Zubieri. The bank has also upgraded phone banking in the market. Arab Bank only allows customers to check their balances. Phone banking with Yemen Gulf Bank offers services similar to its online banking unit, such as transferring funds and paying bills.

Yemen Gulf Bank also has its eye on ATMs. Not only was it the first Yemeni bank to install an ATM, but it has plans to be the first in setting up ATMs in key locations separate from the bank. The idea is for ATMs to be near or inside supermarkets and department stores and in other areas where people are always busy shopping. 'It's silly that people have to go to a bank to get money, and stores don't accept checks or credit cards,' says Zubieri. 'We are aiming at efficiency.'

Also getting into retail banking is International Bank of Yemen. Up until now, its focus has been on corporate banking, dealing with big businesses, especially foreign oil companies working in Yemen. 'Our aim now is to become a one-stop service center for customers,' says Mohamed Al-Qeirshee at International Bank of Yemen. 'We have been a corporate bank. Now we want to aim for customers.'

Within the next few months, International Bank of Yemen will have its own ATMs and phone banking. On the ATM front, the bank will be the first to give customers access to their money in other parts of the world. 'A lot of foreigners come to Yemen and can't use the ATMs available now,' says Saeed Mohamed Bazara, deputy general manager of operations at International Bank of Yemen. 'This will enable tourists and business people who come to Yemen to be able to use their cards and withdraw money using our ATMs. We'll attract a new segment of customers.'

International Bank of Yemen will also put a lot of emphasis on point-of-sale by issuing cards to its customers that can be used in many stores across Yemen. This may be a challenge: Yemen is a market based on cash, and it might take time to convince businesses to accept plastic.

Up until now the bank has sent out a team to lure in merchants, and according to Ahmed Al-Absi, deputy general manager of corporate banking at International Bank of Yemen, progress has been made. 'We are developing relationships with retailers, and they are becoming convinced,' says Al-Absi. 'The bank is starting a plastic market that will eventually replace the cash-based market.

The bank already has a foot in the door, servicing customers outside of its five branches. It is the Yemeni agent for Western Union with 25 locations spread across the country, which is the biggest contributor to its fee-based income (between 10-15 percent of its total income). It now has plans to double its Western Union locations by the end of the year.

With its attention now on services, International Bank of Yemen expects its fee-based income to jump 50 percent this year, which could help increase its profits ($4 million last year). 'Our aim is to improve the quality of services,' says Abdulla Wali Nasher, chairman of International Bank of Yemen. 'We will soon see good results from faster, cheaper and better services than our competitors. We're looking at profits increasing dramatically this year and next.'

But there are doubts that retailing will generate a major payoff in the near future. Some think that it will be very difficult for Yemeni banks to pull customers away from Crédit Agricole Indosuez and Arab Bank. But according to Ali Adbul Rahman Al-Bahr, an economist, there is no need. 'The two foreign banks focus mostly on wealthy clients,' says Al-Bahr.

'The middle- and low-income customers are good targets. This will be their best way to establish themselves in the market. Those customers are available, and the local banks have an advantage: They know the Yemeni people better than the foreign banks.'

Drawing enough middle and low-income customers to the banks will not be an easy chore. Watani Bank, focusing mostly on corporate banking with its core business in letters of credit and letters of guarantee, has taken some steps towards retail banking. It now issues credit cards, has phone banking (with limited services) and has plans to set up ATMs.

According to Al-Hamdani, the bank is being cautious. He estimates that there are only around 250,000 out of over 18 million Yemenis using banks. 'The people don't know very much about banks,' says Al-Hamdani. 'They are either not informed or are skeptical of a place to put their money, not knowing if it is safe. Banking is new to them, so most of them keep their money at home. We need more customers, but it will take time.'

Another obstacle is Yemen's stagnant economy. Its GDP growth rate dropped from 6.5 percent in 2000 to an estimated 1.5 percent last year. Its annual population growth rate - which had been hovering around 3.5 percent - jumped to five percent in 2001. Economists are worried that the numbers of the 40 percent of the Yemenis living in poverty and 35 percent that are unemployed will increase dramatically in the near future unless something is done soon.

This year, the Yemeni government has put into place plans to help boost its economy. Its second five-year reform program, Strategy Vision 2025 and Poverty Reduction Strategy Paper include focusing on economic growth, the development of human resources, improving infrastructure and providing social protection. But some are wondering if the government will deliver.

'During the first phase of the reform program, the government neglected some important issues, like eradicating corruption and providing protection for investments,' says a foreign diplomat. 'This time we have to see results.'

Bankers are hoping for an overhaul of the judicial system so that they can see their fee-based income increase and get more involved in lending. According to Al-Hamdani, the chances of getting assistance from the government are slim: 'It's doubtful. The way things operate in Yemen is not very positive. It'll take a long time for the system to change.'

Even if the government doesn't follow through on its promises while implementing reform programs, Yemeni banks have shown a serious commitment to servicing their customers and modernizing the entire banking sector. Now all they have to do is convince ordinary Yemenis to take their cash out from under the bed and put it in a much safer place.