Gulf financial institutions looking for asset growth and income diversification are increasingly eyeing the Yemeni market. Many Emirates flights from Dubai to Sana’a now include Dubai-based private equity investors and investment bankers. The banking and financial market in Yemen is still a nascent area. Only an estimated 4 per cent of the Yemeni population use banks.
Traditionally, Yemeni consumers has not been welcoming the concept of banking as a mechanism for savings, investment or financing, with the culture of dealing with banks not existing to any meaningful level. Banks’ loans to deposit ratios in Yemen are still less than 30 per cent. Most deposits and funding are instead directed to treasury bills.
However, investors see substantial potential in the long term as the market is very large. Yemen’s population is approximately 23 million, only just below that of Saudi Arabia, which is by far the largest market in the Gulf. Yemen’s population growth is also significant at 3.5 per cent, the highest in the Middle East.
Qatari banks have been noticeable in their recent focus towards the Yemeni banking sector. Doha Bank recently signed a Memorandum of Understanding with the Co-operative and Credit Agricultural Bank (CAC Bank) of Yemen. The MoUhas a three pronged investment structure acquiring a strategic stake in the capital of CAC Bank, taking equal participation in the capital of a newly proposed Islamic bank in the Republic of Yemen, and finally to form a joint venture for promoting insurance and related products in Yemen.
CAC Bank was established in 1982 as a result of the merger of the Agricultural Credit Bank and the National Co-operation Development Bank. The bank operates through its head office in Sana’a. The bank has the largest retail network in Yemen comprising 55 branches. CAC Bank is the only bank in Yemen to print and issue Visa cards. CAC’s good position in the retail sector in Yemen was an attraction for Doha Bank.
The retail segment is also much under-developed in Yemen but the potential market is very big. Gulf banks are now realising it is an important market to be in, and institutions with regional ambitions are making moves. Qatar’s largest bank, Qatar National Bank, opened a branch in Yemen in late 2007, initially focusing more on corporates and institutions.
Islamic banking also offers significant potential in Yemen. This is highlighted by Doha Bank’s participation in a soon-to-be-established Islamic bank in Yemen. Yemen’s current leading Islamic bank is Tadhamon International Islamic Bank. Qatar Islamic Bank has a 3.5 per cent stake of the issued share capital of Tadhamon. Tadhamon achieved record financial results for 2007 with a total income of Yemeni riyals 16,383 billion (Dh304bn), a growth rate of 27 per cent. The bank’s domestic investments increased to riyals 148,675bn in 2007, with a growth rate of 94 per cent.
Tadhamon is in the process of selecting a strategic partner, whereby the selected institution will take a 10 per cent stake. A number of banks have registered interest, many are Gulf institutions. In association with this, Tadhamon plans to raise capital. Going forward, Tadhamon aims to substantially increase its market position in Yemen and become a more active regional player.
However, some obstacles remain for foreign banks to move into Yemen. For example, the International Islamic Union Bank, which has a capital of $100 million (Dh367m), has said it will not come to Yemen unless the Central Bank of Yemen amends an article in its Islamic banking law that allows foreign investors to own just 20 per cent of a bank’s capital. The bank refuses to begin setting up operations in Yemen until its demands are met and is seeking the central bank to allow foreign companies to own 50 per cent. The Central Bank of Yemen is considering the amendment of the Islamic banking law.
Despite the moves and potential in the Yemen banking sector, a number of challenges are evident. Although a large population, the average annual income is only around $450. The banking sector itself suffers from a number of problems. Non-performing loans are high, estimated at more than 30 per cent for the sector, with a poor loan collection record and low provisioning. Banking assets are small due to the vastly under-banked population. Most loans are given to well-known businessmen or on the basis of personal connections, making it hard for independent entrepreneurs to access funding.
The sector continues to suffer from poor enforcement and compliance, a weak judicial system to ensure collection of bad loans (it can take 10 years to recover loans), and a general lack of public trust in the banking system as a whole.
Furthermore, the government’s efforts to sell its two major commercial banks have been rather slow, mainly due to the long preparation time required to bring these banks up to standard for sale. Local banks also compete against the well established domestic operations of Arab Bank and Calyon Bank.
The Yemen economy also remains somewhat sluggish, though it is growing at about five per cent. It depends heavily on oil exports, which currently comprise about 75 per cent of government revenue.
The oil price has aided the economy but oil production is expected to decline over the next few years as oil reserves fall. Nevertheless, this has not stopped foreign interest. Chinese state-owned oil trader Sinochem recently bought Soco International’s stake in a Yemen oil field for $465m.
Yemen-Gulf bank, in partnership with the Kuwait Commercial Bank, has introduced a number of retail products and services into the Yemeni market, including online banking. And it continues to roll out new services that can be used in different retail outlets.