Banking sector: Obstacles and solutions [Archives:2005/857/Business & Economy]

July 7 2005

By Dr. Ahmad I. M. al-Hashedy Al-Bawab
Email:[email protected]
For the Yemen Times

Despite a deterioration in the world economy over the last few years due to several events and variables, Yemen has developed and improved its economy by virtue of the stable political and social situation, the good infrastructure and investment climate that constitutes vital components of the national economy.

In response to directives of President Ali Abdullah Saleh, the government adopted good economic policies with the aim to enhance the economic recovery and follow up a balanced financial and monetary policy, in addition to other policies of savings and investment.

The role of the banking sector has not been confined to the quantitative development through raising the number of financial institutions and developing the size of deposits. Rather, it exceeded this to upgrade the level of payments to cope with the banking and technical developments to reshuffle the banking system and raise its effectiveness through the integration of banking capitals and coordination between difference apparatuses to overcome barriers and investment risks.

We repeatedly emphasize the importance of the banking sector's role in attracting investment and protecting it from any risks to occur. The banking deposits are exposed to risks because of the recurrent financial crisis.

The fruits of implementing the economic and financial reforms and the stability in the national economy all helped activate the private sector and magnified its role in the development process, particularly in the shadow of privatization program.

The last few years witnessed a noticeable increase in the establishment of financial institutions, including the establishment of the Islamic banks under the law No.21 for the year 1996. The Islamic banks have been perceived to pursue their activities according to the constitution and under the control of the Central Bank of Yemen that tops the hierarchy of the Yemeni Banking System.

Now the Yemeni Banking System is composed of 16 banks and 152 branches in all the Yemeni governorates. The commercial activities of such banks and their branches are seen in manifesting the short-run commercial activities.

The Islamic banks cover a considerable portion of the traditional banking services such as receiving deposits, opening current accounts and providing money transfer. Generally, they take part through the direct investment in the commercial, industrial and agricultural activities, and in funding the trade activities in exchange for interest.

Different studies conducted last year showed a rising demand in the country for banking and development services, as well as raising banking awareness and expanding the scope economic and developmental activities that require an increase in the rate of savings and investments.

Meanwhile, achieving an interest is one of the advantages offered by the competition in providing banking and developmental services. This compelled numerous banks to upgrade and improve the mechanisms of their activities.

Despite expanding the banking system and offering investors multiple benefits in the area of insurance, this will not hinder the occurrence of any risks and there is not risk-free investment. Even employing capitals in the formula of deposits is not an investment free from risks.

I believe that offering insurance on deposits, which appeared in the form of specialized institutions to fulfill certain purposes, will help promote investors to make business in different fields.

Investment in the form of deposits appears free from risks, but the daily circumstances will expose big and famous banks to financial crises. We need not confirm that the indicator of the main risk against developmental accesses and loans offered by banks.

Anyone who observes the day-to-day banking routines holds the view that the size of debts is very heavy compared to the capacities of banks in our societies. Personal influences and considerations are believed to stand behind the heavy debts.

An organized and transparent frame of the banking system is essential to guarantee implementing instructions of the executives (the Central Bank of Yemen) and provide a professional administration of banks. This will help the banking sector to overcome the difficulties and barriers that encounter its activities and weaken its capabilities.

The well-organized and transparent frame of the banking sector will enhance its role in raising the rate of savings and allocating them according to certain goals and priorities.

Mechanisms in the Central Bank of Yemen should be applied to specify the price of interest on deposits and rate of legal saving according to the development of the economic situations and reinforcement of the monitoring role on the activities of the banking sector including currency exchange.

The good application of mechanisms at the Central Bank of Yemen will help achieve monetary stability. Due to the importance of the capital in protecting money of lenders, the banking system should give more priority to this resource to become one of the most important strategies to avoid any risks facing the banking activities.

The recommended strategies can be as follows:

1) Banks should have a well-studied strategy with the aim to distribute loans and the developmental and banking facilities to different economic sectors.

2) The banking facilities should be distributed to cover all the economic activities in the sectors of industry, agriculture, trade, fisheries, housing, real estate, shares and many other economic and development activities.

3) The banking sector has to adopt a well-studied strategy to assign the types of work and distribute them to different governorates all over Yemen.

4) The strategy of distribution and diversity has to be converted to cope with the change of situations and conditions.

5) Any bank should have a well-documented database of customers that also can cover information about territorial and geographic distribution.

6) The Central Bank of Yemen have to directly intervene in this field to protect banks and provide the necessary information.

7) Every bank should have a consultant for personal loans as well another consultant for investment loans to instruct workers about their tasks.