Yemeni Islamic Banks Win People’s Trust [Archives:2001/28/Business & Economy]

July 9 2001

Three Islamic banks are working in Yemen: the Islamic Bank, Tadhamon Islamic Bank and Saba Islamic Bank. They are working towards funding, investment and banking in accordance with the Islamic Shariah. They also work in accordance with instructions and regulations issued by the Central Bank of Yemen. Despite the fact that these banks do not have long experience in the banking and investment activities, financial studies show that these banks could in a short span of five years, have been able to win the trust of financial speculators analysis and savers. They could also make handsome profits through the investment projects they fund.

Profit & Loss Sharing:
Bank sources told Yemen Times that the success of the three Islamic banks is attributed to guiding principles two adopted by these banks to pursue their activities. The first one concerns the right planning and the second are to sharing profits and losses with our clients. Adopting these two strategies, the Islamic banks have been able to reduce the losses of shareholders who are contracted with the banks in terms of time selling interest contracts.

Accounting departments of these Islamic banks deal with the Yemeni Riyal and record transactions of the foreign currency during the fiscal year depending on the current exchange rate at the time of recording the deal. At the end of the fiscal year, assets accounts are to be transferred to other currencies on the exchange rate. Results are included in the revenue list.

Private Sector Participation:
Banking sources indicate that the private sector participates with 80% of the capital of these banks.

Factors responsible for the Success of Islamic Banks
The Islamic banks could win the trust of speculators and clients who seek to invest in accordance with the Islamic laws away from the usury.
Banking revenue profits are estimated at more than 58% other than that made by commercial banks. This is attributed to the balanced distribution of the banking resources and making use of them in successful productive and economically viable projects.
For instance, the capital of the Tadhamon Islamic Bank run to $ 6,775,000. Assets of the bank reached more than $ 13,638,000 while deposits of the bank reached $ 4,592,000.
Bank resources assert that the fiduciary paper money deposits have reduced in commercial banks by 20% for the advantage of Islamic banks.

Activities of the Islamic Banks:
Islamic banks follow financial policies different from those of the commercial and specialized banks. These policies concentrates on calculating the speculation processes which are made during the fiscal period in the income list at the time of liquidating the speculation contracts. Debts related to funding interest-contracts whether short or long term are calculated on the cost of the contract adding the interests agreed upon with a reduction of specific rate to deal with general risks.
In a traditional society where people are vulnerable to fall in the trap of usury due to their deposits or taking loans from specialized and commercial banks, they prefer to deal with the Islamic banks. This has made them a conspicuous success.
Stumbling blocks in repayment of debts in commercial banks has made Islamic banks very cautious in granting loans of this kind. Furthermore, they took measures related to funding projects with interest. These are conducted in accordance with conditions of the Central Bank of Yemen. Long and short term debts appear in the budget with their net cost after cutting off irregular debts and general risks, on regular debts and deferred revenues accounts on the date of the budget.
Islamic banks in Yemen work in accordance with law promulgated in 1996. They enjoy many privileges and tax exemptions for the first seven years of their establishment. Islamic banks prepare studies on their clients and other banks before having any dealing with them.

Problems Facing the Islamic Banks:
Banking studies indicate that the main problems facing Islamic banks in Yemen is the difficulty to predict the loss rate of shareholders due to the great number of shareholders and the inefficient administrative cadre. Besides, instructions from the Central Bank of Yemen define that each foreign currency surplus in the Islamic banks should not exceed 15% of the bank’s capital and its reserves. They also specify that the surplus of all currencies should not exceed 20% of its capital and reserves. These factors impede the prospects of Islamic banking.
Statistics and financial lists issued by Islamic banks indicate that the banking has witnessed a remarkable development which qualify them to take part in the establishment of the stock market, activate the investment process and rendering distinguished banking services different from and ahead of other banks.