Bankers Discuss Reasons for Delinquent Loans! [Archives:1998/47/Business & Economy]

November 23 1998

Last week, the Yemeni Banking Studies Institute organized a three-day workshop to discuss the problem of bad loans. Yemen Times reported a YR 15 billion in sub-standard loans.
Given the importance of the issue, it seems necessary to address it one more time, and with the perspectives of the bankers themselves. Yemen Times hereunder summarizes the views of five leading bankers – Mahdi Allawi, Yemen Area Manager of the Arab Bank plc; Mohammed Al-Amery, General Manager of the International Bank of Yemen; and Lutf Mohammed Al-Sarhi, Assistant Supervisor at Saba Islamic Bank.
Mahdi Allawi:
The problem in Yemen is exacerbated by addressing this issue so late. You will recall that the Bank for International Settlements at Basle decided in 1988 to raise the capital adequacy ratio (paid up capital to assets) to 8%.
Unfortunately, the banks in Yemen have not adjusted to this requirement, thus making the bad loans disproportionately high. In the recent past, however, many of the banks have raised their capital, which enables them to handle this problem.

I would like to stress here that any difficulties in the banking sector will directly reflect itself on the overall economic performance. We can see this from the situation of more advanced economies in Southeast Asia and the Far East. Therefore, it is imperative that we give this matter utmost priority.
One of the first steps needed at this time is to categorize the outstanding non-performing debt. Some of it can bounce back with a little help, others are fully delinquent. Some of the collateral has to be liquidated in order to pay for outstanding loans. But we have to be realistic and fair in our approach.
Mohammed Al-Amery:
One of the key steps in resolving this matter is to increase the level of cooperation among banks, as well as with the Central bank of Yemen in order to address this thorny issue. No bank alone can solve the problem of bad loans.

Another part of the solution is really to ask all commercial enterprises to have better accountants. Some of the local accountants do not provide, unfortunately, adequate and reliable services, and up to international standards.
All financial statements should be prepared according to “Generally Accepted Accounting Principles.” The reputation of businessmen or customers must be highly appreciated by banks. All businesses should operate according to Yemeni law, avoid smuggling and illegal actions.
Lutf Mohammed Al-Sarhi:
One of the problems has been that the banks have been able to adequately screen good from bad applications for loans. While this is an initial step, the environment in which banks work has not been helpful. I say this because if a bank provides financing to a businessman or company who is in financial trouble, then neither the official government structure nor the legal system will come to the bank’s rescue.

So, one of the solutions is really to embolden the state structures to take corrective measures in order to empower banks retrieve their money from bad borrowers.
Another issue is the low administrative capacity, even in terms of filing and document preparation among the local business community.
One of the problems is also training and integrity of bank staff. I have noted that in some cases the bank staff do not act in the best interests of the bank, or even with the minimum professionalism. This leads to bad loans and improper conduct.
The banks are asked to play an intermediate role in the new investments envisaged in the country. They can provide credit. The customer should provide a proposal of a viable project.
Heavy construction, petrochemical plants, industry, machinery, warehouses’ material inventories, treating and mixing chemicals for geologic dough under soil, and other projects need enormous amounts of hard currency. Hence, the need to put our banks in order for them to play a meaningful role.
Other financing needs cover merchandise imports and general trade. The service sector, especially in tourism, also need enormous capital outlays.
Track records of customers might help them, at least initially. In the longer-run, it is the viability of the projects and their proper management that will lead to good relations with the banks. It is here that the system can play a role by providing adequate feasibility studies, putting in place a reliable accounting system, and first and foremost, strengthening the judicial system to be credible and effective.
By: Ghassan Al-Ahdal,
Yemen Times.