Yemen Council of Businessmen & Investors:Central Bank of Yemen-Commercial Banks relationship problematic [Archives:2003/633/Business & Economy]

April 27 2003

By Yemen Times Staff
A working paper prepared by the Yemen Council of Businessmen & Investors (YCBI) on the relationship between the Central Bank of Yemen (CBY) and Commercial Banks, presented recently to the Council of Ministers mentions that Yemeni and foreign banks seek to establish a relationship of cooperation, partnership and integration with the CBY. Those banks endeavor aims at surmounting the policies enforced by the CBY, which are distant from reforms and the policy of transformation determining the necessities of partnership relation between the parties based on cooperation and integration. A policy pursued to meet the public and common because such aspired for model of relationship is almost non-existent. The paper presents a vision on the relation between the CBY and the commercial banks. The paper sums up the picture of that relation in general as follows:
1- The two parties existing relationship is based on misunderstanding, a matter which constitutes a state of differences. These differences would ultimately produce mistakes the impact of which is negatively reflected on the kind of relationship between the CBY and commercial banks.
2- The relationship between the two sides is not established according to criteria and rules of partnership. It has become built on an apparent ignoring of banks role in discussing policies relating to bank activity. The CBY does not accept the concept of opinion and other opinion and does not believe in participation and listening to others. Nothing embodies the two parties' relation but sending inspection committee for punishing banks.
3- Unilateral extempore decisions are issued, and the banking sector is usually held responsible for their consequences. This policy makes the banking sector loses
capability of dealing with requirements of activating banking work according to rules fixed for it.
The paper has divided the nature of the relationship between the CBY and the commercial banks into categories or rather chapters. The first chapter of that relation is under the heading of '' Banks role and restricted function''. It says the central bank imposes such restrictions on the banks which make them unable to play their roles. Resulting of those restraints are: a- the Yemeni and foreign banks do not play major roles in investment activity and most of their activities are focused on funding short-range activities restricted to financing trade and small enterprises, b- local and foreign banks do not play a role in financing invested by the ''Policy of monitoring foreign currency''. Yemen's revenues of foreign currency are mainly from oil, while other forms of revenues from tourism and expatriates remittances have dwindled. Thus 90 percent of the mechanism governing the foreign currency has been rendered to the central bank. So in its turn must shoulder the responsibility for preserving the value of the national currency against collapse But the central bank has adopted rule of speculation by adopting a policy of speculating with currency for realizing profit and interference through point for point, justifying that with not giving speculators a chance to seize a large portion of currency reserve. Practical experiments have proved that this supposition is incorrect. The sudden rise of the dollar value in one week and without the presence of any banking justification and the way the bank has treated that crisis according to profiting policy, did not stop that rise but it was rather a cause for its rise. Instead of providing support for the national currency, the central bank followed a policy of selling the dollar according to progressive prices. That has given way to the belief that the central bank supports raising the dollar price. This is regrettably a problematic in the existing relationship between the central bank and commercial banks. This has produced a state of affairs characterized by: 1- the central pursuit of an unclear unilateral policy concerning the dealing with exchange rates and price fluctuation that has led to the rial instability despite of the big reserves the central bank possesses enabling it to enhance strength of the national currency, keeping economic stability and generating confidence in the national currency as this represents a significant importance for attracting local and foreign investments, 2- the central bank does not have a vision of dealing with market requirements and estimation of sudden rise in demand for foreign currency. Incapability in assessing those requirements would make the central bank be surprised by rise in the demand exceeding the proportion of the supply in the market, resulting in depriving the national currency of ability to face the situation and creates severe confusion in price change, 3- this policy adopted by the central bank does not form a cover for providing economic and price stability the government has been seeking for achieving it in its economic program, 4- the policy followed by the central bank has proved its failure in protecting the national currency against sudden disturbances. Essentially its policy should be founded on the necessity of continuous interference by providing a cover for the market needs in the way enabling it to make the dollar exchange rate close to a reasonable price and, 5- the criterion of creating confidence for the local and foreign investors regarding reality of local investments is connected to achieving stability of the local currency.
The third chapter takes the heading of '' The bank's monitoring policy''. Central banks' monitoring of commercial banks activities is one of the functions assigned to them in order to preserve money of depositors and stockholders against misusage or fraud in avoidance of any ill effect that may arise against the national economy and the country's financial and monetary situation that could expose the country to financial disasters. But in the Yemeni example of this relation has created complicated problems with auditor's administration at the central bank. At most cases the banks do not know what the central bank's inspectors are looking for. The bank's inspection committees do not follow clear-cut and objective monitoring criteria. Their work is characterized by personal considerations and the personal dimension of the inspection members and their focus on finding or fabricating violations, thinking that the ideal measurement of efficiency is the discovery of as much as possible examples of violations, whether they are real or fabricated. It is not an aspect of justice to place future and destiny of the commercial banks under the mercy and judgment of inspectors some of whom do not entertain enough banking experience and do not follow an objective way in inspection. To solve this problem the paper suggests that opportunity should be provided for each bank having a grievance against the report by the committee to challenge credibility of the report and the bank's opinion should be listened to by a committee for revising. The paper proposes that the committee should comprise the deputy mayor of the central bank as chairman and the membership of a representative of the monitoring at the bank, representative for the banks and a representative for the Yemen Council of Businessmen and Investors.
The fourth chapter deals with '' Decision of raising proportion of foreign currency reserve''. The CBY has issued an obligatory decision on raising the foreign monetary reserve to 20 percent and without interests. This decision as looked at as a coercive one void of its economic and useful value as it affects the banks centers relation with their correspondents abroad because they grant an interest less than the world rate. This has helped transfer some savings in foreign currency to foreign banks. This measure would lead to the escape abroad of foreign currency revenues. In order to surmount this problem resulting from the CBY policies the YCBI proposes:
– the adoption of a clear banking and monetary policy depending on scientific approach and continuous economic assessment and its convenience to success. The CBY should be more effective and capable of protecting the national currency,
– continuous interference by the CBY to meet needs of foreign currency and enhance the balance of supply and demand and following a policy of covering value of strategic credits through direct relationship with commercial banks and through offering necessary documents, provided that the Central Bank secures demand of credits at the exchange price circulated in the market,
– in case of a sudden rise in foreign currencies exchange we see the CBY should interfere with reasonable amounts of money realizing balance of the supply and demand, not allowing the retreat of the national currency value and that is in realization of the principle of confidence,
-reconsideration of he CBY policy that depends on the basis of selling at a highest price and dealing should be done through dealing with the realistic price of the currency,
– reconsideration of the bank's decision issued on January 20, 2003 pertaining to increasing the proportion of the compulsory reserve of the foreign currency inside to avoid its transfer abroad, resulting from not gaining of a convenient rate of return from those savings and keeping the level of reserve at its former condition and counting interest on banks' compulsory reserve. This would help support the banks' positions regarding their assets of hard currencies,
– engaging the YCBI, Banks Society and Commercial & Islamic Banks in studying important decisions relating to banking activity in the country before their issuance and to setup joint plans to solve any problems facing the national economy and development plans.
In conclusion the report confirmed that relation problematic between the CBY and the banks is considered a most important issue the report sees the necessity of overcoming it and to establish a more effective relationship based on the basis of partnership on which the government banking policies was founded in its reform program. In consolidation of this role the YCBI believes that the government has adopted expansion of the Central Bank's board of directors' membership by elements from outside of the bank. The council sees this is a good initiative towards achievement of partnership and proposes that this membership be based on understanding and coordination between the CBY, YCBI and banks society and commercial banks. The aim is to establish a mode of integration, cooperation and partnership which a basic necessity under the local and world changes and under circumstances the country is in need of mustering all efforts. For achieving this objective the paper proposes the:
-formation of a consultative and coordinating body including the CBY and the YCBI and the commercial banks under a decree by the council of ministers and to be endorsed legally later. The committee should comprise the CBY as chairman and the YCBI and the banks society, local and foreign banks and relevant economic and educational institutions as members. The body's tasks are:
– enriching the monetary and banking policies in the republic of Yemen for realization of stability in exchange price and development of banking performance in enhancement of economic development and economic reforms,
-discussing and enrichment of credit policies in the way making them supportive for development and investment activity in Yemen,
– consolidation of relations between the central bank and other banks in the manner serving the monetary and banking policy,
– establishment of strong and cooperative relations between local banks and regional and world financial institutions aimed at providing guarantees and financing for investment projects in Yemen.