National Banks vs. Newcomers: Threats and Opportunities [Archives:2007/1101/Business & Economy]

November 8 2007

By: Moneer Saif
Yemen's economic performance has recently been improved somewhat. Still it is reflecting exogenous factors as well as domestic political difficulties nowadays. Yemen exerts many efforts to reforms all sectors which include the banking sector that might represent a very crucial one for the economy of the nation. According to the Economist Intelligence Unit, Yemen's “banking system is comprised of the Central Bank of Yemen, 15 commercial banks and two specialized state-owned development banks. Of the 15 commercial banks, nine are private domestic banks including four Islamic banks. Two are majority state-owned The largest commercial bank in the country is the National Bank of Yemen, which is fully state-owned and targeted for privatization.” The EIU also reports that the state-owned Yemen Bank for Reconstruction and Development is being restructured with a view to eventual privatization, although it suffers from a large number of non-performing loans and is undercapitalized, and that the inadequacy of the legal system discourages loans to other than certain preferred clients.

Yemen banking system is still weak therefore the new entrants will create big threats to them unless they can emerge or make a joint venture with these newcomers. If this happens, then the banks will make a kind of creation of enormous national players.

Newcomers or foreign banks which may come to our market will come in a great variety and shapes and sizes. Some people call them as a gatecrasher as they enter the market strongly with big capitals on the contrary they don't think they are gatecrashers but they exploit the situation and potentially profitable commercial opportunity. So the challenge posed by these new coming banks is great unless our banking system can reform their regulations to meet these challenges.

These new comers will be well placed in the banking business, they are as follows:

They will have a known brand name or they can establish new brand names with stronger capitals than the local ones.

They will have a large customer base to market the new service to

They will have the financial resources

They will be experienced at operating in a competitive environment

Above all they can offer very good opportunities for well trained staff with high income and distinctive bonuses paid to them.

However, they will surely face certain problems might affect their performance in the country which is:

They will not have a track record which is a clear problem for them and it amounts to just about the only thing the national banks have going for them in a competitive sense in relation to the threat posed by newcomers. They have not experience of offering banking services and delivering them easily.

They may only have unprofitable customers which may be more persistent problem for new coming banks. They can not have creditworthy and wealthier customers because this kind of customers is likely to have their banking arrangements already deeply embedded in relationship with national banks. But this problem can not be an obstacle for newcomers if they can offer new products and competitive services for these customers.

Their entry will only be credible if they use reliable and staff highly trained in customers services. Still it is not a big problem if they make use highly technological and remote delivery systems. That's why, their customers staff must be of the highest caliber in terms of their personal qualities in the often difficult and sensitive business of handling bank accounts and providing advice regarding financial matters.

From the abovementioned information, the new coming banks to our country will represent a big challenge for national banks but good opportunities for the nation. The Yemen cadres can get chances to improve their incomes, however; they must be qualified enough to meet this requisite. What's more, these new banks coming to our local market can be the most virulent competitive threat of all to national banks. They are here to stay and the impact they have on national banking scene is only likely to increase in the future. They will come with services that meet customers' needs more precisely than those being offered by national banks. Additionally, it will be much easier for newcomers to make impact in the market if it has an existing base of customers who can be targeted as prospective customers of the new products and services. Furthermore, they will attract the most skillful and qualified employees of national banks as they can offer them good opportunities with high income.

Yemen Banks and the absence of Risk Management

For sure, increasingly it is being realized that risk management is the hub of what banking is all about. Recent financial disasters in financial and non-financial firms and in governmental agencies point up the need for various forms of risk management. Financial misadventures are hardly a new phenomenon, but the rapidity with which economic entities can get into trouble is. The savings and loan (S&L) can create crisis in the Yemen and lead to serious regulatory ineptness.

It is universally acknowledged that commercial banks are in the risk business. While they are providing financial services, they assume various kinds of financial risks. Over the last years in Yemen our understanding of the place of commercial banks within the financial sector has improved substantially. Over this time, much has been written on the role of commercial banks in the financial sector, both in the academic literature and in the financial press. These arguments will be neither reviewed nor enumerated here. Suffice it to say that market participants seek the services of these financial institutions because of banks' ability to provide market knowledge, transaction efficiency and funding capability. In performing these roles they generally act as a principal in the transaction by facilitating it and absorbing the risks associated with it.

As noted here in our local market, banks are still in lack of full sets of regulatory requirements. These requirements might be imposed on banks in order to promote the objectives which can protect them from any imminent risks, therefore; they can have reliable risk measures to direct capital to activities with the best risk reward ratios.

Banks need estimates of the size of potential losses to stay within limits imposed by readily available liquidity, by creditors, customers, and regulators. They need mechanisms to monitor positions and create incentives for prudent risk-taking by divisions and individuals.

What we need to do? Risk management can create the process by which managers satisfy their needs to indentify key risks, obtain consistent, understandable, operational risk measures, and choose which risks to reduce and which to increase and by what means and establishing procedures to monitor the resulting risk position. Based on the previous information risk management may be defined as reductions in firm value due to changes in the business environment. Typically, here are the key risks for banks that can monitor them while they perform their activities: Credit risk, Currency risk, Custody risk, Interest rate risk & Market risk, Technology risk, Performance risk and Operational risks.

We are not here to give details on them just to point out these key risk encounter banking system and how banks can make decisions to control risks successfully.

Yemen banks still have an unconvincing knowledge of risk management. It has seen slow-moving in banks' ability to understand the nature of the risk that faces them which enable them to develop methods for assessing it. The risk sentiments is still absent in some other banks. They are acting based on the: “the Act of Allah is there”. As a result, there is a lack of risk management cadres which leads us to the fact that we might face hard time in the future. Despite of this, some banks attempt to recently have risk management departments but they should be furnished with international standards of risk management.

As a result, Yemen banks must have the full banking regulations requirements and the most important minimum requirement in banking regulation is minimum capital ratios. In operating risk management system, it requires a significant knowledge of the risks considered and the approaches used to measure them. It is inconceivable that Boards of Directors and even most senior managers have the level of expertise necessary to operate the evolving system. Yet government regulators represented by Central Bank of Yemen seem to have no idea of the level of complexity of this subject, and they must increase accountability even as the requisite knowledge to control various parts of the banks increases.

The Central Bank must strongly supervise the licensed banks for compliance with the requirements and should respond to breaches of the requirements through obtaining undertakings, giving directions, imposing penalties or revoking the bank's license.

Above all there should be increasing awareness on risk management and adopt the new methods of measuring and managing risk especially many Yemeni banks direct their investments in international markets. So they have to apply these risk measures such as Value at risk (VAR) which has become especially prominent, and now serves as the basis for the most recent BIS market risk based capital requirement.

Moneer Saif is a treasurer & financial analyst at Tadhamon International Islamic Banks.

[email protected]