ACRI-MENA ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010

ARAB CREDIT REPORTING INITIATIVE: GREEN BOOK
AN ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010
GREEN BOOK - an assessment of the credit reporting system in Yemen
July 2010
ACRONYMS AND ABBREVI ATIONS

ACRI AMF ATM CACB CBY COC CPI CRWG CSO GDP GCBP IFC MENA MFI MOF MOI MSME NBFI NID NPL NMFF PAR PCB PCR PE POS PPSC SFD SME WB YBA YER Arab Credit Reporting Initiative Arab Monetary Fund Automated Teller Machine Cooperative and Agricultural Credit Bank Central Bank of Yemen Code of Conduct Consumer Price Index Credit Reporting Working Group Central Statistical Organization Gross Domestic Product Global Credit Bureau Program International Finance Corporation Middle East and North Africa Microfinance Institution Ministry of Finance Ministry of Interiors Micro, Small and Medium Enterprise Non Banking Financial Institution National Identification Non Performing Loans National Microfinance Foundation Portfolio at Risk Private Credit Bureau Public Credit Registry Public Enterprise Point of Sale Post and Postal Savings Corporation Social Fund for Development Small Medium Enterprise World Bank Yemen Bankers Association Yemeni Riyal
ACRI |A joint effort by the Arab Monetary Fund and the International Finance Corporation
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FOREWORD
Credit information sharing is essential to facilitate financial markets intermediation and to broaden the depth and breadth of financial service offerings. Sharing the credit history of potential individual and business borrowers allows lenders to determine borrower creditworthiness and decrease transaction costs associated with lending. This information exchange also facilitates lenders outreach to underserved populations, who in the absence of credit information sharing may be marginalized - either due to the excessively high costs of determining their creditworthiness, or as a result of the impossibility to offer solid guarantees. Within this context, International Finance Corporation (IFC) and the Arab Monetary Fund (AMF) have established the Arab Credit Reporting Initiative (ACRI) aimed at promoting the development of credit information sharing in the Middle East and North Africa (MENA) region. ACRI leverages IFCs global 1 expertise in developing credit information services and AMFs regional network of financial market regulators to: i) ii) iii) iv) assess the credit information infrastructure in select MENA markets, promote reforms that support best practice credit information sharing, raise awareness about the importance of credit information sharing, and support regulators, government bodies and financial institutions within MENA region to establish/enhance credit reporting systems.
ACRI undertakes a number of activities, including confidential in-depth credit market assessments, which are presented to financial market regulators while non-confidential overviews which are made public to facilitate exchange of information and ideas, and annual conferences focusing on issues of particular interest in the credit reporting field. With a similar goal of sharing knowledge, ACRI has established a knowledge portal (www.acri-mena.org) to share its results and other relevant information pertaining to credit information sharing. This report on Yemen is the second in a series of credit market assessments. It has been prepared by ACRI specialists with thanks to the Central Bank of Yemen, the lending community and several governmental agencies for their incessant support and cooperation. More information about IFC is available on http://www.ifc.org, while information about AMF is available on http://www.amf.org.ae.
Oscar Madeddu
Credit Bureau and Risk Management Advisor International Finance Corporation
Mohammed Taha Rafi

MENA Credit Bureau Program International Finance Corporation
Hafid Oubrik
Payment Systems Specialist Arab Monetary Fund
IFC has extensive experience developing credit information systems in emerging markets. Since 2001, IFCs Global Credit Bureau Program has helped create and/or significantly improve 13 credit bureaus, contributed to drafting credit information laws in 21 countries, and organized over 100 credit information sharing outreach events in 40 countries. IFC, jointly with the World Bank, surveys the status of information sharing in 183 countries with the annual Doing Business report.
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CONTENTS
1. MACROECONOMICS AN D DEMOGRAPHICS ................................................. 6 1.1 COUNTRY PROFILE AND ECONOMIC OVERVIEW ................................................ 6 1.2. DEMOGRAPHICS AND POPULATION TRENDS ..................................................... 7 2. STATUS OF CREDIT AND FINANCI AL MARKETS ...................................... 9 2.1 ACCESS TO FINANCE .................................................................................................... 9 2.2 MARKET PLAYERS ....................................................................................................... 13
2.2.1 BANKS ........................................................................................................................................ 13 2.2.2 MICROFINANCE INSTITUTIONS .......................................................................................... 15 2.2.3 MOBILE TELEPHONE COMPANIES .................................................................................... 18 2.2.4 OTHER LENDING INSTITUTIONS ........................................................................................ 18 2.2.5 THE CENTRAL BANK OF YEMEN ........................................................................................ 19
2.3 CREDIT RISK MANAGEMENT & CREDIT ACCESS CONSTRAINTS ................ 20

2.3.1 COLLATERAL, NON PERFORMING LOANS, REJECTION RATES............................... 20 2.3.1.1 COLLATERAL AND GUARANTEES .................................................................................. 20 2.3.1.2 NON PERFORMING LOANS............................................................................................... 21 2.3.1.3 REJECTION RATES ............................................................................................................. 22
2.3.2 CREDIT UNDERWRITING & PORTFOLIO MANAGEMENT TECHNIQUES ... 23 3. STATUS OF CREDIT REPORTING IN YEMEN ............................................. 25 3.1 OVERVIEW ...................................................................................................................... 25 3.2 PRIVATE INFORMATION PROVIDERS..................................................................... 26 3.3 THE PUBLIC CREDIT REGISTRY OF THE CBY ..................................................... 27 3.4 UPGRADING THE PUBLIC CREDIT REGISTRY OF THE CBY ........................... 32 3.5. PUBLIC INFORMATION SOURCES .......................................................................... 38 3.6. OTHER STAKEHOLDERS .......................................................................................... 38
3.6.1. MINISTRY OF FINANCE ........................................................................................................ 38 3.6.2 MINISTRY OF INTERIOR........................................................................................................ 38 3.6.3 YEMEN BANKERS ASSOCIATION ....................................................................................... 39 3.6.4 SOCIAL FUND FOR DEVELOPMENT .................................................................................. 39 3.6.5 POST OFFICE COMPANY ...................................................................................................... 40 3.6.6 MONEYCHANGERS ................................................................................................................ 41 3.6.7 PENSION FUNDS ..................................................................................................................... 41 3.6.8 LEASING COMPANIES ........................................................................................................... 41 3.6.9 COLLATERAL REGISTRY ...................................................................................................... 42 3.6.10. STOCK EXCHANGE ............................................................................................................. 42
4. STATUS OF LEG AL F RAMEWORK ................................................................... 43 4.1. CREDIT REPORTING LEGAL FRAMEWORK GUIDELINES ............................... 43
4.1.1 SUPERVISION .......................................................................................................................... 43 4.1.2 LICENSING ................................................................................................................................ 43 4.1.3 HOW TO DEAL WITH BANK SECRECY .............................................................................. 44
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4.2 LEGISLATION IMPACTING CREDIT REPORTING IN YEMEN ............................ 45 4.3 BORROWERS CONSENT ........................................................................................... 50 4.4 NATIONAL IDENTIFICATION NUMBER ................................................................... 50 5. CONCLUSIONS ............................................................................................................ 51 5.1. A STRATEGY TO ENHANCE YEMENS NATIONAL CREDIT REPORTING SYSTEM .................................................................................................................................. 51 5.2 COMPARING EXISTING AND IDEAL CREDIT REPORTING MODELS ............. 54 ANNEXES ............................................................................................................................. 60
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1. MACROECONOMICS AND DEMOGRAPHICS

1.1 COUNTRY PROFILE AND ECONOMIC OVERVIEW
The effects of the recent global financial crisis on Yemens economy have been minimal due to limited integration with the international economy and relative underdevelopment of the local market. In the short term, oil remains the most important resource of the country (approximately 90% of exports) and Yemens economy may be influenced by the reduced demand from oil dependent countries, as well as by the internationally reduced prices of hydrocarbons and derivative products. Yemens GDP in 2008 totaled US$ 27 billion, growing at an estimated annual rate of 4.2% . The sharp decrease of oil prices in 2008 negatively impacted overall GDP growth. However, growth in non-oil sectors (9%) of Yemens economy partially compensated for reduced oil revenues. Similar trends persisted in 2009 with a registered sharp decline in oil revenues during the course of the year, projecting a significant drop in 2009 when annualized. years from The US$ per capita GDP
3 2
Figure 1: Map of Yemen
Figure 2: GDP per capita based on purchasing-powerpower-parity (US$) (*) 2009 estimated parity (US$) (*) 2009 estimated
2600 2500 2400 2300 2200 2100 2000 1900 2003 GDP per capita 2182 2004 2109 2005 2203 2006 2276 2007 2347 2008 2410
Figure 2: GDP per capita based on purchasing-
2009* 2474
has an
significantly increased (Figure 2) in the last ten 1,405 (1990) to estimated US$ 2,474 (2009).
20
Figure3: GDP and Consumer Price Index Figure 3: GDP and Consumer Price Index (*) 2008 estimate (*) 2008 estimate
18 16 14 12 10 8 6 4 2 0 2003 GDP % CPI% 3.3 10.8 2004 3.1 12.5 2005 5.8 9.8 2006 4.5 10.9 2007 4.7 7.9 2008* 4.8 19
However, due to high inflation (Figure 3), real GDP has been negative. In 2008, inflation has been driven by food and commodities price increase, but according to recently released Central Bank of Yemen (CBY) data, the Consumer Price Index (CPI) is expected to remain under control. The
2 3
Central Bank Yemen, Annual Report, 2007 and World Bank Sanaa Yemen Economic Update, Spring 2009 Index Mundi on IMF data, http://www.indexmundi.com/yemen/gdp_per_capita_(ppp).html, October 22, 2009
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cumulative inflation from December 2008 to July 2009 was only 1.9%, while on a yearly basis the average inflation reached 4.4%. The most likely impact of the global financial crisis will be reduced foreign direct investments and limited inward remittances, representing a vital flow of revenue estimated at 5%-6% of the GDP. World Bank analysis of the EIA (Energy Information Administration) data shows Yemens declining oil output with production peaking in 2004-5 (Figure 4). Yemen will continue pursuing integration with regional economies by pursuing efforts to join GCC while pushing through a series of structural reforms started in the past few years. Reforms will include land registration, land transportation, national identification, electricity, social insurance, anti-money laundering, income tax, investment, and telecommunications. Furthermore, the Government is seeking to implement a strategy to modernize the country by diversification of exports beyond oil.
4
460 440 Year Avg Monthly
Figure Yemen Crude Figure 4:4: YemenCrude Oil Production (bbls/day) Production (bbls/day)
420
400 380 360
340
320 300 280
2004
2005
2006
2007
2008
1.2. DEMOGRAPHICS AND POPULATION TRENDS

The countrys population, with an annual growth rate of 3.4% , is expected to triple by 2050 to 58 million urbanization. Over 70% of the population currently lives in rural areas.
Figure 5: Population Pyramid 2010 Figure 6: Population Pyramid 2050
5 6
(Figures 5 and 6). Yemens young population (almost 50% are under 15 years) is undergoing rapid
However, major cities, such as Sanaa are expected to double the number of inhabitants within the next 15 years (Table 1).
4 5
The World Bank Sanaa, Yemen Economic Update, Spring 2009 Index Mundi, Yemen Demographic Profile, http://www.indexmundi.com/yemen/demographics_profile.html, 2009 6 Population Reference Bureau, http://www.prb.org/Countries/Yemen.aspx#, October 21, 2009
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(in thousands) Table 1: Population of urban agglomerations 2005-20257 City Al Hudaydah Sanaa Taizz 2005 672 1801 657 2007 780 2008 751 2010 951 2345 902 2015 1232 2955 1159 2020 1528 3636 1437 2025 1854 4382 1743
The literacy rate (able to read and write) for the adult (over 15 years) population is roughly 50% comprised of nearly 71% males (Table 2). In 2006/2007 the number of students enrolled in the school system totaled 4.85 million, of which 41% were girls.
(in thousands) Table 2: Number of Students at various stages of Education8 Stage Basic Education Secondary Education Total 2005/2006 Male 2,364 353 2,717 Female 1,608 173 1,781 Total 3,972 526 4,498 Male 2,496 366 2,882 2006/2007 Female 1,774 195 1,969 Total 4,270 581 4,851
The formal economy in Yemen is characterized by a ballooned public sector administration, representing the largest employer, and a private sector dominated by a limited number of private companies. Unemployment rates are nearing 35% in 2007. The work force of Yemen is mainly employed in agriculture (54%) and herding. Services, construction, industry, and commerce, account for less than 25% of the work force. The number of Yemeni nationals working abroad in 2005 was estimated at 2.8% of the population. During the last 8 years, the inflow of remittances has averaged USD 1.29 billion (roughly 6.1% of GDP) - if outflow remittances are also considered. However, the volume of remittances is expected to decrease in 2010 due to the global financial crisis. With population growth, the expected increase of the work force will have considerable repercussions on the job market, new housing stock and the increased demand for durable and semi-durable consumer goods (cars, furniture, appliances, and technology). This will create opportunities for the credit industry requiring a shift in focus from business needs typically restricted to large business groups, to individual credit needs.
Increased access to credit has played an evident role in improving the quality of life of a majority of the Yemeni populace. Broader, steadier and easier credit flows can represent the only exit strategy for the poorest and largest segment of the population, helping to create micro and small enterprises that can be the backbone of the economy.
Population Division, Department of Economic and Social Affairs, United Nations Secretariat, World Population Prospects, Ed.2006, and World Urbanization Prospects, Ed 2007, http://esa.un.org/unup, October 21, 2009. 8 Ministry of Education Data.
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2. STATUS OF CREDIT AND FINANCIAL MARKETS

2.1 ACCESS TO FINANCE
The size of the credit market in Yemen is still very modest and financial service penetration number of rate is extremely
9
BOX1: YEMEN CREDIT & FINANCIAL MARKETS SNAPSHOT

Population: 23 to 24 million. Bank clients with an account: less than 5% of population. Loan clients: less than 1% of population (November 2009, CBY). Operative banks: 18 including private, public, and Islamic. Banks network: 215 branches (2007) and 238 ATMs. CBY branches: 22. Ratio branches/population: approximately 1 for every 107,000 people. Total credit outstanding: YER 912 billion (August 2009). Total banks credit outstanding: YER 910 billion (August 2009). Total MFIs credit outstanding: YER 2 billion (March 2009). Bank credit to private sector: 45% of total outstanding. Bank loan interest rates: generally between 15% - 20%. Money changers: 521 licensed (2007). MFIs: 13 Social Fund for Development associates, including NGOS - all unregulated. MFI banks: 2 (Al-Amal and Tadhamon) both regulated by CBY. MFI loan customers: 38,091 (March 2009). MFI depositors: 30,430 (March 2009). MFI total loans disbursed since inception: 253,650. MFI volumes disbursed since inception: YER 12,2 billion. MFI P.A.R.: from 0.1% to 16.7%. MFIs client profile: mostly women (up to 100% in some MFIs). MFIs average loan: US$ 200. NBFI, Retailers and retail credit: none. Debit cards: new, negligible utilization at ATM. P.O.S: negligible presence, network creation in progress. Credit cards: virtually absent. Underwriting procedures: extremely traditional. Collateral: always requested. Scoring: absent or sporadic and internally built.
low.
According to World Bank analysis , the people with a formal, financial institution relationship neared 800,000 in 2008 (approximately 4% of the population), with a penetration of 35 depositors for every 1,000 people. Saving accounts and deposits are the most popular products, while credit, which is dominated by the banking sector, remains at a relatively nascent stage of development. Access to finance is difficult, limited, cumbersome and negligible - particularly for the low income Medium workers, Micro and Small mainly Enterprises (which
compose the informal strata of the economy), as well as for individual consumers, principally those from the non-salaried category.
Currently, the total number of borrowers being served by Yemens banking sector is only 129,905 customers (individuals and firms)
10
Figure 6: Credit Distribution by sector(2007)

1% 14%
Figure 7: Credit distribution by sector (2007)
- roughly 0.6% of
14%
the population. The outstanding loan-to-GDP ratio is 8%. This is not only due to highly selective lending practices by banks, but also due to a focus on lending to corporate and high net worth individuals. The credit market is highly concentrated, liquid, and traditional.
9
Agriculture and Fishing
7%
22%
Industry Construction Trade Others Classified Loans
42%
Social and Economic Development Group MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008 10 Central Bank of Yemen, Presentation at the ACRI workshop, Abu Dhabi, November 9, 2009
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Banks are well positioned to significantly expand credit and play a greater role in Yemens economy. Often, banks in Yemen are not able to effectively play the intermediation role. Yemeni banks funds are structured as follows: - 70% to finance the Government, - 20% for intermediation, and - 10% placed with foreign correspondents banks.
12 11
The overall loans/deposit ratio is 33% , which is significantly higher than the regional average and severely limits access to finance. Banks network coverage is largely insufficient and when compared with similar countries, shows one of the lowest ratios in the MENA region (Figure 8), both in terms of territorial and population coverage.
Figure 8: Bank Branches
13
Deposits have been increasing in the last five years at a compounded rate of approximately 15%, reaching the amount of YER 1,275 billion (USD 6.25 billion) as of August 2009. Foreign currency deposits represent over 41% of the total deposits , with time deposits (32%) coming second in client preferences. As of October 2009, 18 banks (4 public and 14 private of which 4 are Islamic banks and 5 are foreign branches) were operating in Yemen under the supervision of CBY.
11
Figure 9: Bank Deposits (YER millions)

1,400,000
1,200,000 1,000,000
800,000 600,000 400,000
14
200,000 0
2005 Deposits 637,958 2006 851,044 2007 1,050,932 Aug-08 1,159,706 Aug-09 1,275,100
Social and Economic Development Group MENAs Financial Sector Review Yemen Financial Sector Reform: a Proposed Action Plan, 2008 12 Central Bank of Yemen, Presentation at the ACRI workshop, Abu Dhabi, November 9, 2009 13 World Bank. Finance for All comparator countries are Albania, Bolivia, Ethiopia, Ghana, Honduras, Kenya, Tanzania, Uganda and Zambia. Bangladesh and Pakistan have much more developed financial systems, nearly five times as many bank branches, and are not factored in this figure. 14 Central Bank of Yemen, Annual Report, 2007.
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Microfinance institutions (MFI) represent the only alternative channel of finance available. They are generally associated with the Social Fund for Development (SFD), and are not regulated by CBY. Al-Amal and Tadhamon are two commercial banks which are an exception to this rule, and are operating in the microfinance sector under CBY regulation.
Figure 10: Deposit by type (YER millions Aug. 2009)

1,400,000 1,200,000 1,000,000 800,000 600,000
400,000 200,000 0
Government Deposits 333 Demand 149,523 Time 415,379 Savings 116,399 Foreign Currency 534,206 Earmarked 59,260 Total 1275100
Table 3: Number of Financial Establishments and Corporations: 2002 to 2006
2002-6002 Number of Financial Establishments and Corporations: 2002 to 2006

Year Item Banks
Unsecured is not among
credit banks.
common
S 1
2006* 17 1 10 4 2 463 17 446 16 12 4 496
2005 17 1 10 4 2 410 14 396 16 12 4 443
2004 18 1 11 4 2 349 14 335 16 12 4 383
2003 18 1 11 4 2 341 10 331 15 11 4 374
2002 18 1 11 4 2 299 7 292 15 11 4 332
There remains a heavy reliance on collateral secure transactions large to credit for corporate
1
1-1 2-1 3-1 4-1 2 1-2 2-2 3 1-3 3-2
1-1 The Central Bank 1-2 Commercial banks 1-3 Islamic banks 1-4 Specialized banks 2 Exchange
2-1 Exchange companies 2-2 Exchange offices 3 Insurance Corporations & Pension funds
borrowers as well as for individuals. MFIs have also the of a credits. adopted practice requiring lines of
3-1 Insurance Corporations 3-2 Pension and annuity funds Total

* Prelim inary data Sources of data:
(1) Central Bank of Yem en for data on banks and exchange com panies, several bulletins (2) Ministry of Industry & Com m erce for Insurance Com panies (3) Ministry of Finance for Pension and annuity funds
* : (1) (2) (3)
guarantee to grant
This has been extended to service providers such as mobile telephone operators who require 100% cash collateral for post-paid contracts . Despite high collateralization, the absence of strong creditors rights and a weak legal framework result in lenders, often facing delays, in enforcing collateral. This makes credit more risky and expensive for lenders and borrowers. Furthermore, access to finance remains limited by the absence of advanced risk management tools, lack of complete and reliable credit information, ubiquitous financial documentation requirements burdened with bureaucratic procedures and a long decision-making process. World Bank analysis
15 16
15
16
has shown that almost 83% of firms in Yemen claim to have never received a bank loan, and
Field interview with MTN, October 6, 2009. Social and Economic Development Group, MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008 and Investment Climate Assessment, 2006
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among medium enterprises only 28.9% have ever used a bank. Another major constraint raised by 47% of large firms and 32% of small firms is the high cost of credit.
Figure 11: Clearing Room
The
financial
landscape limited the
in to most
Yemen cash
remains constitutes and
traditional financial products, and common method of payment for business personal transactions alike. Indicative of this is the number of checks cleared on a monthly basis by CBY (Figure 11). This number, while increasing gradually, still remains low. During July and August 2009, the CBY processed approximately each 63,000
17
checks Checking
month .
accounts and debit cards though present are generally utilized by a minority of the population - in most cases, the wealthy. Leasing has been recently introduced, though it will require legislation and better financial infrastructure (such as a fully functioning credit registry, collateral registry, leased property registry, etc.) for broader acceptance to take place. As mentioned, while credit penetration remains low, banks are starting to include SME and consumer market segments to capitalize on credit potential and economic opportunities. A more inclusive and healthier credit growth can be achieved based on borrower demand, competition among lenders and through greater financial literacy of the borrowing public. International experience has shown that as the credit market develops, other non-regulated commercial entities will start granting credit, for e.g. retailers, mobile telephone companies, etc. It can also reasonably be expected that consumer, SME and micro credit segments will drive growth and profitability of the credit industry through higher volumes and value of loans granted. However, such growth will depend on availability of complete and comprehensive credit history and adoption of automated risk management tools (e.g. credit scoring) by financial institutions. The regulatory role of CBY will also be crucial in encouraging the development of a solid and healthy credit market.
17
Central Bank of Yemen, Review of Monetary and Banking Developments, August 2009
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2.2 MARKET PLAYERS

2.2.1 BANKS
The banking system of Yemen is comprised of 16 commercial banks and 2 special development banks (Housing Bank and Yemen Bank for Reconstruction and Development). Four banks are state owned, the rest are either foreign bank branches (five) or owned by local private shareholders (nine). The penetration and the market share of Islamic banks are growing, and some banks (e.g. Tadhamon, Saba and the Islamic Bank of Yemen for Finance and Investment IBYFI) are increasingly active in this credit sector. Al Amal (established in 2009) and Tadhamon are operating in the microfinance sector, with the former completely dedicated to microfinance and providing Islamic micro credit loans. All the eighteen banks are licensed and supervised by CBY.
Table 4: List of Yemeni Banks as of October 2009 S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Particulars Al-Amal Bank Arab Bank Calyon Credit Agricole Cooperative & Agriculture Credit Bank Housing Bank Islamic Bank of Yemen for Finance and Investment International Bank of Yemen National Bank of Yemen Qatar National Bank Rafidan Bank Saba Islamic Bank Shamil Bank of Yemen and Bahrain Tadhamon International Islamic Bank The Yemen Bank of Reconstruction and Development United Bank Ltd Yemen Commercial Bank Yemen Gulf Bank Yemen Kuwait Bank for Trade and Investment
In order to boost and support the growth of the economy and in the absence of strong private sector banks, the government set-up 3 development banks, each one focusing on a specific economic sector: 1. The Yemen Bank for Reconstruction and Development, founded in 1962, with the aim to promote industrial development and offering products like credit guarantees and industrial loans. 2. The Housing Credit Bank, created in 1977, with the purpose of offering mortgage loans to both private individuals and firms operating in the construction sector. 3. The Cooperative and Agricultural Credit Bank (CACB), established in 1982, with the original goal to support farming and fishing activities in acquiring equipment and offering traditional loans as well.
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The CACB has been recently restructured, as part of the reform process undertaken by the government, to concentrate on the retail credit sector. The banking industry as a whole remains small and at an early stage of sophistication, with assets representing approximately 30% of GDP . Banks credit volumes were YER 909.9 billion (USD 4.46 billion), or 99.8% of total credit outstanding as of August 2009. Private credit represents nearly 45% of total credit in 2009, down from 59% in 2008. Government borrowings have absorbed 53% of banking sector credit in 2009, against 39% during the same period in 2008. Yemens bank network is
19 18
Figure 12: Outstanding bank loans and advances (YER million)

1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0
2005 to governemnt to public client to private Total 2006 2007 Aug-08 Aug-09
180,205
43 225,783 406,031
202,693
3,062 266,118 471,873
289,342
7,072 359,477 655,891
287,798
9,110 431,353 728,261
484,789
16,066 409,056 909,911
severely
under
Figure 13: Banks Branch Network as of end of 2007

0 12 21 5 13 1 10 46 29 21 6 40
branched. The banking sectors branch network is comprised of 228 branches

20
with the highest
concentration in Sanaa . In Yemen, 100,000 customers are serviced per branch, while in developing countries the same
21
number
of
customers is serviced by 8-9 branches (11.6 in Morocco, 29.8 in Lebanon) . The three major public banks (Figure 13) represent the majority of the network (53%). A simpler
22
8
YRD NBY ABL
11
3 52 HCB CALYON
UBL
IBY
TIIB
YKB
SIB
CACB
WB
RB
SBYB
YCB
W BYGB
IBD
QNB
regulation
could
facilitate
branch
Figure 14: Branches per square kilometer
openings, and thereby increase branch network coverage. Research has shown that requirements for branch approval are detrimental as they correspond to a lower branch penetration (Figure 14). CBY maintains a separate network of 22 branches which play an institutional role and do not offer commercial population.
18
financial
services
to
the
general
Social and Economic Development Group, MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008 19 Central Bank of Yemen, November, 2009 20 Central Bank of Yemen, Annual Report, 2007 21 CGAP, Financial Access, http://www.cgap.org/financialindicators, 2009 22 CGAP, Financial Access, http://www.cgap.org/financialindicators, 2009
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Figure 15: Automated Teller Machines Figure 14: Automated Teller Machines
The ATM network remains extremely limited despite a 46% growth since 2007
23
(Figure
250 200 150
15). One ATM services 96,600 people. This remains considerably low if compared with other emerging markets with an average of 23 ATM machines for 100,000 people. abroad and scarcely
24
100
50 0 ATM
Credit cards are still rare, mainly utilized accepted by the commercial network in Yemen.
2005 117
2006 163
2007 238
2.2.2 MICROFINANCE INSTITUTIONS

Microfinance institutions represent the only alternative credit channel to the banking system. Microfinance credit volumes compared to banks outstanding are only 0.2% (YER 1.98 billion as of March 2009). The sector is gaining importance in Yemen, and since the start of microfinance operations, it has cumulatively disbursed credit of YER 12,759 billion
25
Figure 16: Total outstanding loans YER billions Figure 15: Total outstanding loans volume-volume(August 2009) YER billions (August 2009)
2.00
(USD 62.54 billion).

910.00
13 MFIs are associated with SFD and 11 are fully operational in Yemen. Most institutions operate in the
MFI
BANKS
capital city of Sanaa; some have a larger network comprising branches in rural areas. Women represent the vast majority of loan customers and in the case of some MFIs represent 100% of the portfolio, for example, in the case of Abyan S&C and Al-Awael MF Company. Since inception of the microfinance sector, MFIs have disbursed over 253,000 micro loans. This represents the importance of MFIs, and makes these institutions a vital finance channel, particularly for the vast sector of active, non-bankable borrowers, that is the informal economy. It is noteworthy, that in the case of Yemen, this comprises most of the active population . As of March 2009, the number of active micro loans in the MFIs books totaled 38,091, of which 45% were concentrated in the two larger MFIs (National Micro Finance Foundation-NMFF with 12,132 loans and MF Development Program-Nama- with 5,005) as indicated in Figure 17. It is estimated that another 5,000 micro loans have also been granted by other NGOs, not associated with the SFD.
23 24
Figure 17: Total outstanding microcredit loans Figure: 16(as of March 2009) Total outstanding microcredit loans
( as of march 2009)
1370 2118 2378 12,132 1378
742
417
2365 3116 3500 3561
5,005
26
Al-Amal Abyan SFSD
SOFD Aden SMEF
National Al-Awael Al-Hudaidah
MFDP Sana'a Wadi
Central Bank of Yemen, Annual Report, 2007 CGAP, Financial Access, http://www.cgap.org/financialindicators, 2009 25 Small and Micro Enterprise Development in Yemen, SFD, 2009 26 Lenders estimate
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BOX 2: BANK AL-AMAL: A NEW OPPORTUNITY FOR MICRO-ENTREPRENEURS Al-Amal Microfinance Bank was established by Law (23 of 2002), as the first Microfinance Bank in Yemen. However, operations have started only recently in January 2009. Al- Amal is a partial undertaking of the Government of Yemen (it owns 45% of the institution through the SFD); the other shareholders are the AGFUND (Arab Gulf Program for United Nations Development Organizations) with 35%, and the private sector with 20% (Figure 18). Al-Amals objective is to increase access to finance for poor clients engaged in productive activities (micro-entrepreneurs) as well as a broader range of services (savings, insurance, etc.) to help them in improving their businesses. A challenging 5 year strategy has been drafted (Figure 19) with the objective to enroll 100,000 active customers by the year 2013 and an outstanding loan volume of US$ 56.7 million. Since its roll-out, Al-Amal Bank has acquired 3,400 loan customers (2,700 are active) and 2,600 depositors (mainly voluntary savings). Women represent 52% of the total active borrowers. New branches have been recently opened and others are in the pipeline for the next few years Apart from individual loans, the bank grants solidarity loans as well (ranging from US$50 to US$ 4,000 with a current average of US$300). Guarantees are generally requested, either the psychological collective solidarity in case of group loans, or personal guarantees, guarantors, or cash collateral. Islamic microfinance products are provided by the financial institutions. The decisional chain is based on loan amounts with equal involvement of branches, regions and HQ. Al-Amal is regulated by CBY and must report credit data to the CBYs PCR. As of October 2009, this was not the case. Al-Amal claims a very low Portfolio at Risk (P.A.R.) ratio (nearly 0%) which could also be explained with its very recent start of operations.
Source: Al-Amal Management Interview, November 2009
Figure 18: Al-Amal Bank Shareholders Bank Shareholders Figure 17: Al-Amal
20%
35%
45%
Private Sector
Yemen Government
AGFUND
Figure 19: Al-Amal Bank 5 Year Plan (loan volumes)

60,000 50,000 40,000 30,000 20,000 10,000 2009 Outstanding (000,US$) Disbursed (000.US$) 550 1,200 2010 2,700 6,200 2011 7,150 16,900 2012 14,150 33,900 2013 23,400 56,700
Table 5: Staff Loans Particulars Staff Loan Officers Branches Clients Outstanding (000, US$) Disbursed (000, US$) 2009 58 22 4 4,500 550 1,200 2010 142 66 10 15,000 2700 6,200 2011 248 128 18 40,000 7150 16,900 2012 379 206 28 70,000 14150 33,900 2013 531 298 40 100,000 23,400 56,700
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Loans and savings are the two major product offerings of Microfinance Banks (MFBs). Loans can be viewed as two types: micro loans (average US$ 150 200, up to US$ 1,000) granted to micro enterprises with 1 to 4 employees, and small loans (average US$ 2,500, up to US$ 20,000) granted to small entrepreneurs that employ 5 to 50 workers. As of March 2009, MFBs reported a depositor base of 30,430 with almost 50% (14,856) being customers of National Microfinance Foundation (NMFF). P.A.R. varies significantly across MFBs and MFIs, ranging from 0% to 16.7% (March 2009). Typically, the larger institutions have a better managed portfolio and lower levels of risk, although over-indebtedness is becoming a significant issue based on an analysis of the basic
BOX 3: MICROFINANCE INSTITUTIONS AND COLLATERAL A common practice of the Yemeni microfinance industry is the frequent use of collateral; guarantees are requested for small loans. In the case of solidarity group lending, the moral, social, psychological pressure serve as collateral as well - though this is a more customary practice elsewhere. The anomalous routine of requesting collateral for micro credit loans (though the average loan amount is often higher in Yemen than the ones granted in other regions) is likely caused by a lack of reliable data. These issues are symptoms of an underdeveloped credit risk management system which can be improved by a comprehensive, shared credit information database. The positive impact of a PCB could be an important factor for change, leading to increased access to micro credit and stronger portfolio performance. Yemeni MFIs fully agree on the information sharing concept as well as need and are keen to participate in the creation of a potential PCB.
information maintained by SFD. The lack of information sharing may prevent reduced lending rates for micro-enterprises and also lead to a more serious over-indebtedness problem compounding the P.A.R. Microfinance operations are regulated by a law (No. 15/2009) which authorizes microfinance banks to provide banking service to families, small businesses and smaller projects in the urban and rural sectors of the country. The law regulates the role of the microfinance banks, defines the targeted typologies of clients, and establishes that MFIs are to be supervised by the CBY. This implies that, among the many modifications and upgrades that the MFBs will have to undertake, there will also be the necessity to provide complete monthly information on loans portfolio to the CBY. A major review and significant investments need to be undertaken by the MFIs to achieve the sectors growth potential. Such changes will enable MFIs to participate in and contribute to the development of a much needed information sharing infrastructure, which will support broader access to finance. Although credit volumes of commercial banks will likely be higher, robust growth in microfinance can see the number of MFI loan accounts; exceed those of commercial banks in a span of 3-5 years. To achieve this, the following, are some of the major issues that will need to be addressed: - Need of systems upgrade, automation, training of credit officers and improved service offerings. - Comprehensive credit information sharing. - Improved portfolio monitoring and P.A.R. control in some cases. - Introduction of wider range of product offerings (e.g. micro-insurance). - Removal of subsidy to MFIs and reduction of operational costs. - Lack of standardized practices, processes and policies. - Limited territorial coverage and high urban concentration. - Lack of programs for borrowers financial education.
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2.2.3 MOBILE TELEPHONE COMPANIES

In the past few years, mobile connections have grown by 40%-50%. Four main operators (MTN-Spacetel Yemen, Yemen Mobile, Sabafon, Y-Hits Unitel) are currently competing in Yemen. They have acquired approximately 6 million customers - with MTN being the market leader, with its portfolio of roughly 2.7 million customers, as of October 2009. Market penetration remains low, and according to different sources, it varies from 24%
27
to 30% . According to industry growth estimates, it is expected that the

29
28
number of customers will reach 10 million active users in the next 3 years. The average air-time consumption per contract is USD 7 per month . This is much lower than other comparable countries, for e.g., in Cape Verde, the air-time per capita consumption is roughly USD 20 per month. Air time prices remain high, and services are limited to basic ones. The mobile telecom market in Yemen is a business characterized by elevated advanced cash flows, and negligible credit risk for the providers. It is estimated that up to 90% of mobile subscribers in Yemen have opted for prepaid contracts. Mobile post-paid contracts, those that have greater relevance to credit behavior, account for approximately 600,000 - 750,000, which is 10% to 15% of the total subscriber base. This customer portfolio represents the largest customer base in the commercial banking or MFI sectors. One of the limitations in further expansion of post-paid contracts is the cash-collateral; typically an amount corresponding to the credit limit requested by each new applicant. In case of corporate and business firms (which represent 40% of total prepaid contracts while the remaining 60% are individuals), a bank letter of guarantee is also accepted. Higher limits are automatically authorized based on good payment performance and airtime utilization by the customer. However, each limit increase must be supported by an additional guarantee. Best customers are sometimes authorized to exceed the credit limit; however this is an exception rather than the rule. Currently there is no formal or informal exchange of information, nor a collective blacklist being maintained by the four operators in Yemen. Mobile telephone contract applications do not include the consumers consent to share data with third parties. Identification is always required with new contracts, although it is not always the new national ID number, instead, a personal identification, passport, or student card is also accepted.
2.2.4 OTHER LENDING INSTITUTIONS

Presently, no other commercial lenders are operating in Yemen, such as retailers, supermarkets, NBFI, NGOs. There is no stock exchange in Yemen and the money market remains limited to issuance and negotiation of treasury bills. Money changers have a well developed network across Yemen with their operations licensed by CBY, although they are not allowed to distribute financial services such as loans. If efforts are made to develop alternate lending sources, such as retailers, the following benefits may accrue:
27 28 29
MTN estimates, October 4, 2009 Market Research.Com, http://www.marketresearch.com/product/display.asp?productid=2384211, October, 2009 Market Research.Com, http://www.marketresearch.com/product/display.asp?productid=2384211, October, 2009
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i) ii)
banks may acquire new customers, increase their portfolio volumes, limit their acquisition costs, and strongly increase cross-selling opportunities; retailers would dramatically increase sales without maintaining high levels of working capital, immobilized in their outlets, generating a faster sales rotation;
iii) Consumers could avoid the wait to purchase durable and semi-durable goods, until accumulating savings over long periods. Local retailers neither have the size, the organization, or any immediate plans to enter directly into the credit market. They remain focused on their primary sales activity, while the Yemeni population continues a high dependence on cash for trade transactions.
2.2.5 THE CENTRAL BANK OF YEMEN

CBY was established in 1971 as an independent authority to regulate financial and credit markets in Yemen. In 1990, after the unification of South and North Yemen, the CBY was merged with the Bank of Yemen as the sole regulator for the banking sector. Law 14 of 2000 establishes CBY as an independent body, created to carry out all the functions of a normal central bank with the paramount objectives of conducting monetary policy to keep inflation under control, stabilize the exchange rate of the national currency and promote investment and economic growth. It is entrusted to a Board of Directors, headed by a Governor. The headquarters of the CBY are in Sanaa while branches are operational in each of the twenty Governorates of the country. The missions and main objectives are summarized as follows:
30
1. Monetary Policy - The CBY uses all the tools of monetary policy at its disposal to keep inflation under control, stabilize the exchange rate of the national currency and create an environment that is conducive to investment and high growth. Among the main monetary tools used by the CBY are the interest rate, the discount rate, the reserve requirements, foreign exchange markets interventions, and issuing of certificates of deposits. 2. Bank Supervision - The CBY supervises the banking system with a view to promoting its sound functioning and protecting the interests of depositors and shareholders. 3. National Currency - The CBY is the governmental agency which issues the countrys currency (YER). The exchange rate of the Yemeni Riyal has been floating freely since 1 July 1996, and there has been only one single exchange rate since then. 4. Management of the Official Reserves - The CBY keeps the countrys foreign reserves, investing and managing them in the best interests of the national economy. The official reserves have risen from 2.8 months of import cover in 1994, to 15 months in 2004. The commercial banks are free to deal in the foreign exchange market and are allowed to keep balances in foreign currencies for their account
30
Central Bank of Yemen, http://www.centralbank.gov.ye/
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at home and abroad. There are no restrictions on the transfer of foreign currencies abroad, as the Republic of Yemen has accepted Article VIII of the International Monetary Fund in December 1996. 5. Bankers Bank - The Central Bank of Yemen maintains accounts for the commercial banks and acts as a clearing house for their transactions. The commercial banks keep statutory reserves with the Central Bank as a ratio of their deposits. This ratio varies from time to time in accordance with the condition and state of the economy. It is one of the monetary tools at the disposal of the Central Bank. 6. Governments Banker - Besides maintaining accounts for the various Government ministries and agencies, the CBY also keeps accounts in the name of international institutions, from which it makes payment orders to the concerned parties as instructed. Furthermore, the CBY manages the issue and redemption of treasury bills. 7. Other ancillary functions:
CBY acts as lender of last resort. CBY administers and manages the external public debt of the country. CBY acts as advisor to the Government. CBY implements economic and financial policies. CBY publishes financial and economic data and reports on a regular basis, reflecting the health of the domestic economy.
2.3 CREDIT RISK MANAGEMENT & CREDIT ACCESS CONSTRAINTS

2.3.1 COLLATERAL, NON PERFORMING LOANS, REJECTION RATES 2.3.1.1 COLLATERAL AND GUARANTEES
Among the limiting factors to a faster expansion of credit is the ubiquitous requirement of collateral and guarantees which make the Yemeni credit system highly selective and expensive. All credit lines and loans granted are backed-up by the applicant either with physical/real collateral or with personal guarantees, through a co-guarantor/s, using cash collateral or guarantee deposits. Even salary may be a collateral surrogate and a pre-requisite to obtain credit. A steady salary or a certified income is the basic condition to be considered eligible for a loan. However, this leads to entrepreneurs (typically from the informal sector) being cut-out from the traditional credit channels. Even microfinance institutions often request guarantees for micro loans. An example of how guarantees influence access to credit is indicated in the table below, which has been extrapolated from responses to the business/risk questionnaires supplied by the banks to IFC .
31
31
The name of the bank is not mentioned here for confidentiality reasons. The products not ticked are not available at the bank.
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Table 6: Credit Products TYPE OF CREDIT PRODUCT CREDIT CARDS PERSONAL LOANS CAR LOANS MORTGAGES OVERDRAFT MICROCREDIT LOANS SME LOANS OTHERS (SPECIFY) COLLATERAL REQUIRED (YES/NO) YES YES YES YES % OF CREDIT ACCOUNTS FOR WHICH COLLATERAL IS REQUIRED 100% 100% 100% 100% OTHER TYPE OF GUARANTEE, IF REQUIRED (SPECIFY TYPE) SALARY SALARY INSURANCE SALARY ACCOUNT RECEIVABLE NOTES/ EXPLANATIONS
Guarantees/collateral requirement seems to be the foundation of all credit policies in Yemen, and the most common risk
Borrowers, particularly the most vulnerable segments (individual borrowers, micro- entrepreneurs and the informal sector), are often unable to provide guarantees. With a lack of comprehensive and reliable credit information, lenders are unable to distinguish good from bad customers. In turn, they adopt two options to protect their portfolio: either increase disproportionately the interest rate applied, or more frequently, reject an applicant rather than take a potential risk. Reputational collateral allows a significant diminution of collateral requirements and helps to improve access to credit. It is generated by the historical payment performance, i.e. credit history data, both positive and negative, especially at the consumers level. Accessing this data about all borrowers is reliable, free and easy and it is much more effective than real collateral for small ticket loans. BOX 4: REPUTATIONAL COLLATERAL VS. COLLATERAL
protection and exit strategy for the banks. It is certainly a major factor holding up a full credit democratization, and one of the key areas for improvement in the current credit granting procedures. This issue can best be addressed by the establishment of a full credit information sharing system and through the dissemination of complete credit histories among lenders.
2.3.1.2 NON PERFORMING LOANS

No official and definitive Non Performing Loans (NPL) ratios are available for the first 6 months of 2009. However, banks have cited NPL ratios ranging from 1% to 12%, across various sectors and customer segments, with higher peaks discovered with overdrafts and business loans. CBY records
32
(2004-2007) show bad loans decreasing in the past
years and portfolio quality has improved, NPLs levels can be reduced through better risk management. NPLs dropped from 17.28% in 2006 to 13.86% in 2007 (Table 7) with high levels of risk associated with public enterprises.
32
Social and Economic Development Group, MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008.
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In millions YER Table 7: Loan Portfolio Quality of Commercial Banks in Yemen (2004-07) CLASSIFICATION Performing Substandard Doubtful Loss Gross loans & advances Nonperforming loans RATIOS (%) NPL ratio Coverage ratio Open loan exposure ratio 17.39 84.24 13.51 16.44 81.99 13.06 17.28 75.15 15.86 13.86 59.54 23.32 2004 151,680.4 4,030.0 3,539.1 24,361.8 183,611.3 31,930.9 2005 186,073.2 3,501.7 3,677.5 29,439.0 222,691.4 36,618.2 2006 217,545.5 6,540.9 7,313.5 31,602.5 263,002.4 45,456.9 2007 309,857.3 15,276.4 6,899.8 27,661.0 359,694.5 49,837.2
Source: Supervision Department, Central Bank of Yemen.
Banks have recently started consumer lending, therefore the historical data of the associated portfolios is too limited to conduct meaningful analysis of NPLs in consumer loans. Loans granted in the absence of reliable credit information sharing among lenders and, consequently, more advanced underwriting tools, will require close monitoring. As for microfinance institutions, their P.A.R. ranges from 0% to 16.7% as of March 2009.
2.3.1.3 REJECTION RATES

The following are the general observations about rejection rates of credit applicants: i. Rejections rates range from 7%-21%, with the highest percentage in those banks which are aggressively pursuing an increased market share in retail credit . However, this percentage is related to those applications that are selected for assessment by the credit committee. ii. Rejection rates for applications that do not reach any decision stage but are discarded before being officially filed and completed is higher, though unknown and unrecorded. iii. The extremely low credit penetration among the population is indicative of selective credit applications being raised for approval, as well as the low motivation of potential borrowers to file a credit application. The main reasons for rejection cited by banks in response to the IFC survey are: i) lack of information, ii) insufficient income, iii) bad references. Insufficient income ranges from 40-80% as the major cause of rejection (Table 8) . The absence of reliable and comprehensive credit information is the second reason
34 33
33 34
Questionnaires supplied by Yemeni banks to IFC, October 2009. Questionnaires supplied by Yemeni banks to IFC, October 2009.
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for rejection. Rejection rates and biased subjective judgments can be significantly reduced through the availability and utilization of credit information and advanced credit tools (e.g. credit scoring).
Table 8: Rejection Reasons Particulars No information Bad references Insufficient income Minimum size Total Bank 1 25% 50% 0 25% 100% 10% 100% Bank 2 10% 10% 80% Bank 3 20% 30% 50% Bank 4 N/A N/A N/A N/A N/A 100% 100% 100% 100% Bank 5 20% 80% Bank 6 30% 30% 40% Bank 7 10% 20% 70% Bank 8 20% 10% 70%
2.3.2 CREDIT UNDERWRITING & PORTFOLIO MANAGEMENT TECHNIQUES

Risk management techniques implemented at banks are still traditional. Existing credit underwriting is characterized by long decision chains, centralized decision making by costly credit committees, excessive reliance on collateral, high operational costs, partial automation, lack of advanced risk management tools, and utilization of very limited credit information. Credit scoring is mostly absent or at best in the early planning stages of development at some banks. Application scoring is not utilized yet, apart from some elementary and internally built, generic systems (Table 9) . While retail focused lenders are on the verge of introducing risk assessment methodology, it will still take some time before the first statistically built scoring system is developed and adopted by the credit industry in Yemen. None of the financial entities who responded to the ACRI survey are using a custom scoring model built by a leading international provider. Only one private bank has mentioned plans to introduce a custom application scoring model, which will be based on the banks own portfolio data. Behavioral scoring models and automated account management systems have yet to be introduced. However, this may be due to the small size of consumer portfolios.
Table 9: Scoring utilization Particular Scoring utilization Bank 1 No Bank 2 No Bank 3 No Bank 4 No Bank 5 No Bank 6 No Bank 7 Internal Bank 8 Internal
35
Automated credit application processing has not been implemented at any of the banks in Yemen (Table 10). This may remain difficult to achieve till such time that the CBY PCR and internal bank systems are upgraded. A typical information verification process workflow may entail separate: i) Inquiry to CBYs PCR, and ii) Informal banking reference checks (with other lenders).
35
Questionnaires supplied by Yemeni banks to the ACRI team, October 2009.
Page 23

Table 10: Full Automated Application Bank 1 Full automated application No Bank 2 No Bank 3 No Bank 4 No Bank 5 No
July 2010
Bank 6 No
Bank 7 No
Bank 8 No
These procedures are often not integrated in the lenders main application processing systems, leading to delayed approvals and increased operational costs. Generally, credit decisions are taken by a credit committee staffed with several resources. More recently, banks have adopted decisional delegation matrixes, allowing branches to take some decisions for smaller amounts. Banks will need to fine-tune their credit policies and portfolio strategies going forward. Additionally, the entire lending industry will have to significantly upgrade existing systems to support strong growth and increased volume of business. Furthermore, there remains a significant disparity between the level of technology and internal capacity between banks and microfinance institutions, as MFIs are operating at a much more basic level and are in need of support. Training in advanced risk management techniques and adoption of tools will be critical to the further development of lending. Increasing these skills inside the credit industry, would bring immense positive results, and support the expansion of access to finance for potentially good customers.
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3. STATUS OF CREDIT REPORTING IN YEMEN

3.1 OVERVIEW
While CBY is operating a Public Credit Registry, there are no private sector credit information providers operating in Yemen. Banks in Yemen typically rely on customer references that are informally exchanged on a case-by-case basis without any regulation, and offer no protection for borrowers privacy or rights. The CBY has recently received and implemented the PCR software from the Central Bank of the U.A.E. This system will be rolled out pending the successful completion of the test phase. This will help achieve an automated credit information sharing system, providing CBY with an effective supervisory tool to monitor the credit growth and support the banking sector in increasing access to credit to deserving clients. The main enhancement of the new PCR is online data reporting and inquiry processes, and inclusion of consumers credit and small ticket loan information (after removal of the minimum threshold -YER 500,000 (US$ 2,470) for reporting data). The revamped PCR system will receive and disseminate information from the sixteen regulated financial institutions. The PCR is becoming an important tool for the evaluation and management of credit risks inside regulated financial institutions. Moreover, the implementation of this system will lead to full sharing of positive credit information in Yemen. Issues of data quality and quantity will persist within the PCR, as several financial institutions are currently unable to provide the full data set in a systematic and regular manner. MFIs are working with SFD on a pilot for collecting credit information from associated MFIs. The data is essentially demographic information (name, ID, address) which is then being aggregated to develop a black list. There is no positive information or any type of loan data being considered for dissemination. Banks, as a major lending sector, are not participating in this pilot project. Borrowers consent is not required to share customer information; this could create a potential legal issue.
Figure 20: Scenario of credit information sharing
Fig 19: Scenarios of credit information sharing
With increased focus on small ticket loans by commercial banks, a project is being undertaken by the Yemen Banks Association (YBA) which aims at establishing a private credit bureau, limited to banks only. CBY has granted an authorization to YBA to establish a PCB. However, the development is on hold till the launch of the new CBYs PCR. If YBA were to undertake the development of a PCB system, the participation of a skilled, technological
"Fragmented"(e.g. information shared among banks only or retail only) Lower Predictiveness (e.g. Mexico, Kuwait) Lower Predictiveness (e.g. Botswana) "Full" (information shared by banks, retailers, NBFIs)
types of information Postive & Negative Information sources of information Negative Information
High Predictiveness ( e.g. U.S., UK,India)
Lower Predictiveness (e.g. Australia, Switerland)
provider/partner may be required.
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The development of credit information databases should seek to develop an integrated database across all segments of borrowers and lenders. In the absence of this, the effectiveness of integrated and comprehensive credit information would reduce the efficacy of the PCR/PCB by fragmenting the financial profile and credit history of borrowers. Consolidated databases containing all the credit information (positive and negative) provided by all lending sectors should be encouraged to promote quality and effectiveness of information sharing services. All banks and MFIs in Yemen agree on the need to contribute data to a single pooled database. Although the PCR shares information among regulated financial entities only, the inclusion of MFIs in information sharing will improve the breadth and depth of information. This dataset can then be used to enhance the risk assessment available to participants. The success of the PCR will also depend on increased awareness of credit information sharing concepts and the benefits it can accrue through a wider range of service offerings. CBYs guidance, monitoring, and training of financial institutions on the PCRs functionality and services will be important. This will ensure that lenders: i) provide the entirety of the information included in their portfolio, regardless of the loan amount; ii) improve the quality of data provided to the PCR; and iii) ensure regulatory compliance. Financial institutions will need to commit resources towards upgrading systems and aligning procedures to enable regular sharing of consumer and corporate loan data. They will also need to provide extensive staff training as the lack of familiarity of existing bank staff with the new technology and processes may undermine the success of the credit reporting. Only a portion of the existing banks the CBY.
36
are currently able to provide the
complete portfolio data to the CBY. These efforts should be a priority for lenders with the strong support of
3.2 PRIVATE INFORMATION PROVIDERS

As mentioned, there are no private information providers operating in Yemen, and no positive information sharing schemes are present yet. Black list (court judgments, derogatory information, tribunal sentences) are neither collected nor disseminated in a formalized manner by any private information provider. Regarding the establishment of a PCB in the future, there is no identified private sector entity with the requisite knowledge, skill set, technology, previous experience, and business know-how to establish and offer a comprehensive and robust credit reporting. Fulfilling the requirements of a hypothetical RFP (Request for Proposal) and independently bidding for the establishment of a full-file, state-of-the-art PCB may be difficult for a local vendor. Thus the direct participation of a reputed international information provider may need to be considered.
36
As of March 2009 only 16 banks were contributing data to the CBYs PCR, mostly alleging technical problems.
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3.3 THE PUBLIC CREDIT REGISTRY OF THE CBY

PCRs are mostly operated by Central Banks and in some instances by the Superintendence of Financial Entities (e.g. in Latin America). They are the major aggregator of credit and loan information but are mostly limited to information from the financial institutions they supervise, under mandate of the law or through regulation. The information stored in these databases is mostly used to support the prudential regulation and banking supervision. The data is generally used as well to supply services to internal customers (e.g. monetary policies department, statistical department, etc.) and to produce economic analysis and research (analyzing credit sectors, credit quality, credit risk models, largest borrowers, ratios, lending concentration, statistics, etc.). PCRs are often set-up as the first institution to foster local credit information sharing, instilling a culture among financial institutions to report this data, and disseminating aggregated
1 Regulated entities Banks 2
Central Bank (no borrower's consent required) 4
Figure 21: Mandatory credit information sharing model Fig 20: Mandatory credit information sharing model
Credit Applicants (inf ormation)
information as credit reports. This is because information sharing is a fundamental necessity in any financial market, and the benefits offered by complete credit reporting systems are supported by copious empirical evidence .
37
Regulated entities IBFI
Regulated entities MFI
Non-regulated commercial entities
Non-regulated financial entities
Borrowers' consent is required
Few examples of such benefits are mitigated moral hazard and adverse selection, reduced default rates, reduced credit cost and increased access to credit.
5
PCB 1
PCB 2
PCB 3
PCB 4
Bank 1
Bank 2
Bank 3
NBFI
MFI
Retailer
TELCO
Figure 22: Voluntary credit information sharing model Fig 21: Voluntary credit information sharing model
PCRs are more likely to remain present where private root. sector Sometimes ,
38
information PCRs also
sharing
1
Regulated entities Banks Regulated entities IBFI
Credit Applicants (inf ormation)
arrangements, such as PCBs, have not taken supply information to PCBs under the Central Bank
Regulated entities MFI
Non-regulated commercial entities
Non-regulated financial entities
mandate that requires all lenders to report positive and negative credit information.
3 Bank 1 Bank 2 Bank 3 NBFI MFI Retailer TELCO
Credit Bureaus (with and/ or without borrower's consent
37
38
Jappelli, T. and M. Pagano, Information Sharing in Credit Markets: International Evidence, Inter-American Development Bank, Working Paper R-371, June 1999. Further statistical evidence for Brazil and Argentina has been found in Majnoni, G., M. Miller, N. Mylenko and A. Powell, Improving Credit Information, Bank Regulation and Supervision: On the Role and Design of Public Credit Registries, World Bank, June 2004. See also Barron J. and M. Staten, The Value of Comprehensive Credit Reports: Lessons from the U.S. Experience, Purdue and Georgetown Universities, 2003. Ecuador, Morocco, Bolivia, and Peru, for example, are among the countries where the supervising authorities of banks, share information directly with Private Credit Bureaus.
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However, PCRs and PCBs can co-exist by maintaining complementary roles while promoting the development, operation and maturing of the credit information market. In Yemen, CBY established the first paper-based PCR in 1975. In 1998, the first system revision led to the introduction of some automated functionality. In April 2009, a thorough revamp of the system was undertaken with the new software currently being tested before roll-out. The CBYs PCR is used for internal reporting and monitoring purposes and, is currently, the only organized source of credit information available to the lenders for credit risk assessment in Yemen. All the financial institutions supervised by CBY are mandated to report all credit information on all borrowers, without any limit on the loan amount or the customer segment . However, the quantity of data records reported and stored in the PCR is still very limited. The PCR covers less than 0.2% of the Yemeni population (Table 11) .
Table 11: Procuring Credit in Middle East and North Africa 2010 Getting Credit Economy Algeria Bahrain Djibouti Egypt Iran Iraq Jordan Kuwait Lebanon Morocco Oman Qatar Saudi Arabia Syria Tunisia U.A.E. West Bank and Gaza Yemen Year Rank 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 135 87 177 71 113 167 127 87 87 87 127 135 61 181 87 71 167 150 Depth of credit information Index (0-6) 2 4 1 6 3 0 2 4 5 5 2 2 6 0 5 5 3 2 Public registry coverage (% of adults) 0.2 0 0.2 2.5 31.3 0 1 0 8.3 0 17 0 0 0 19.9 7.3 6.5 0.2 Private bureau coverage (% of adults) 0 34.9 0 8.2 0 0 0 30.4 0 14 0 0 17.9 0 0 12.6 0 0
40 39
As of October 9, 2009, the number of borrower records provided by financial institutions was 16,642 for a total outstanding volume of YER 336 million (USD 1.64 million). Of the 16,642 records registered in the PCR, 14,893 belong to individuals, 1288 to sole traders, 8 to governmental agencies, and 453 to business firms (Figure 23).
39
The former threshold of YER 500,000 has been eliminated by the CBY aiming at collecting consumers and other small ticket loans data. 40 World Bank/IFC, Doing Business Report: Getting Credit in Middle East and North Africa, 2010.
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The team responsible for the PCRs operation is composed of nine officials; three for IT and system maintenance, and six to follow day by day activity and the relationship with the users/data providers. The following are the main features of the new PCR system at CBY: a. Online inquiry and update. b. Positive and negative information about firms and individual borrowers. c. Regulated financial institutions mandated to
Figure 23: Type of borrowers vs. Count (All Banks)

Figure 22: Types of borrowers vs. Count (All Banks)
Individuals
Sole LLC JSC Govt. FI 1,288 260 192 8 1
14,893
5,000
10,000
15,000
20,000
report all data with no minimum threshold being applied. d. A commercial registry number generated by the PCR system automatically for each new customer (business firms and/or consumers). e. Regulated financial institutions mandated to get a PCR report prior to granting credit. f. Inquiries followed by online updated transactions for newly approved loans. g. For existing loans, every new transaction registered by the lenders generates updates on borrowers account in the PCR system. h. Updates are transmitted daily. i. No fees are charged to lenders for the credit reports provided. j. CBY issued regulation enforcing borrowers rights on their own information. A comparison of the data reported by two banks having the largest number of retail customers (Figure 24) shows only 4.7% and 2.3% of all their active loans being reported. This low level of reporting is due to the inability of such institutions to capture, collect and subsequently report data in a timely manner to the CBY. A summary of all 16 banks data contributed to the PCR, as of October 2009, reports a low level of
Loans Contributions to PCR
Figure 24: Loans provided to PCR (as of Oct 7, 2009)

45,000 40,000
35,000 30,000 25,000 20,000 15,000 10,000 5,000
Bank 1 23,422 537 Bank 2 40,159 1,884
customers.
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Table 12 Banks Loans Reported to the PCR - 2009 S No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Bank Name Arab Bank International Bank Of Yemen Saba Islamic Bank Yemen Commercial Bank Shamil Bank Of Yemen & Bahrain Calyon Credit Agricole CIB United Bank LTD Co operative & Agricultural Credit Bank The Yemen Bank for Reconstruction and Development National Bank of Yemen Yemen Gulf bank Yemen Kuwait Bank for Trade & Investment Tadhamon Islamic Bank Islamic Bank of Yemen for Finance and Investment Qatar National Bank (QNB) Rafidan Bank Total Total Customers 1,163 5,307 3,748 1,061 628 191 118 1,186 636 545 235 219 351 523 14 17 16,642 Used Funded 49,095,705 22,761,323 22,622,572 8,110,541 9,713,003 6,108,417 13,347,254 9,247,972 6,558,339 7,188,374 4,220,164 4,848,381 8,078,329 5,030,683 610,707 93,531 Used Contingent 21,006,603 13,918,426 13,085,237 18,548,795 15,790,080 16,056,705 7,039,076 9,878,719 12,107,629 8,369,080 8,566,365 7,272,883 2,197,177 1,899,967 2,730,534 0 Total Used YER 70,102,308 36,679,729 35,707,809 26,659,336 25,503,083 22,165,122 20,386,330 19,126,691 18,724,665 15,557,454 12,786,529 12,121,264 10,275,506 6,930,650 3,341,241 93,531 336,161,248
While all data concerning business customers is generally provided, most banks seem less equipped to provide data on smaller loans (below the threshold of YER 500,000), which is the category of loans recently added to the PCR. Though this circumstance is possibly the result of persisting technical issues, it is in contravention to the basic principle of reciprocity
41
necessary for the success of credit reporting.
Even if one lender is not contributing the complete and comprehensive dataset to the registry, it may prejudice the quality of the database, credit underwriting process and customer evaluation carried out by other financial institutions. Among the most significant issues limiting the performance of the registry are: i) Data returned is minimal and in an aggregated form. Reports do not include historical data and arrears (current, worst, oldest, most recent, legal status, etc.). This is reflected in the sample business firm credit report (only six heads of information are available).The same type of report with limited information is provided to lenders in case of individual consumer.
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The reciprocity principle is a basic guideline of credit reporting, and prescribes that no inquiries to the credit bureau are allowed for users who do not contribute their credit information to the pooled database.
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Table 13 PCRs Credit Report for a Business Firm S No. 1 Bank Name Saba Islamic Bank Total Limit Funded 27,468 27,468 Limit Contingent 0 0 Limit Total 27,468 27,468 Used Funded 27,468 27,468 Used Contingent 0 0 Used Total 27,468 27,468 Fac. Class. O.L.E.M.
ii)
Absence of automated logic checks on quantity of records provided. The system is not equipped with logic control/comparison with quantity of data provided, account closures, etc.
Table 14 PCRs Credit Report for an Individual
S No.
Bank Name Co operative & Agriculture Credit Bank Total
Limit Funded 810 810
Limit Contingent 0 0
Limit Total 810 810
Used Funded 810 810
Used Contingent 0 0
Used Total 810 810
Fac. Class. Normal
iii)
Absence of automated logic checks on quality of records. These checks are done manually by the PCR staff when the initial registration of a new customer is made to the PCR, through the first lenders inquiry, and again when the same is returned with correct data. This time and cost consuming process is also labor intensive and can be a source of significant savings.
iv) v) vi)
Weak performance of the matching algorithm based on an unsophisticated search key (name and surname plus any available personal identification number). Negligible utilization of the new National ID number (unique, definitive ID number) which would strengthen database quality and reduce manual interventions of PCR staff. Limited data returned to lenders, under an aggregated form which is inadequate for underwriting consumer and SME credit.
vii) System tailored to mainly service regulated-supervised financial entities. viii) System customized to accommodate mainly business data and supply information services to evaluate corporate and firm applicants, which may not suffice to support and serve a massive growth of the credit system. ix) x) xi) Ancillary services and additional characteristics that can be generated by the activity of the lenders with PCR not yet contemplated (e.g. previous searches list). Absence of intensive and on-going training plan for IT and PCR staff on new system. Absence of back-up IT and telecom systems, and disaster recovery plans.
xii) Absence of clear procedures for consumers rights enforcement. xiii) Erratic requests of borrowers consent by lenders. xiv) Lack of clear procedures and controls on data to be carried out during on-site supervisory audits xv) Absence of any checks on lenders inquiry activity and data provision to the PCR. xvi) Non integration of unpaid checks file. xvii) Lack of mechanism to integrate other external files/data (e.g. balance sheets, civil register, telephone directories, public derogatory information).
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xviii) Lack of a periodical management report on PCR activity (e.g. security logs, hit-ratio). xix) Deadlines, sanctions and violations in case of dissatisfactory compliance to be systematically applied. xx) Law does not clearly establish any time limit for keeping historical data stored inside the database.
3.4 UPGRADING THE PUBLIC CREDIT REGISTRY OF THE CBY

The above issues require further capacity building investments at CBY for staffing, training, IT systems, telecommunications, etc. The CBYs endeavor to make the PCR an effective tool for credit underwriting and supervision should be pursued as the registry represents the fulcrum of the credit reporting system in Yemen. In addition, it is expected that for another 2-3 years the PCR will probably remain the only available source of information (as establishing a PCB can take 24-30 months). For the medium term, CBYs objective should be to support an advanced, private, integrated, full information sharing system eradicating any legal constraints that may affect the establishment of such a scheme. Although the PCR system source code has been provided to CBY, the IT structure dedicated to the maintenance of the system has not received sufficient training on the system features and functionalities. This limits the possibility of a quick implementation of the system functionalities, as well as the possibilities of upgrade, improvement, customization to the needs of CBY and of the lenders. An on-site training conducted by the organization which delivered the system, is definitely needed to allow the PCR team to perform the necessary enhancements and realize its full potential. The new national ID number introduced by the government is an important tool for the establishment of a reliable credit reporting system. The national ID card bears a registration number that is unique (prevents duplications) and definitive (it remains tagged with citizens indefinitely and is also useful in the case of loss or renewal). National ID numbers are a powerful and indispensable tool for the consolidation of the PCR database, as well as a reliable search key for potential credit registry/private credit bureaus. However, the National ID has not been provided to all citizens, and this undermines CBYs efforts to improve the quality of the PCR, provokes fragmentation of credit histories inside the database, and does not permit quality enhancement. Mandating users to always obtain the National ID number, whenever opening a new banking relationship with a customer may substantially improve the quality of the PCR. One option may be to mandate that no bank account should be opened in Yemen unless the applicant provides a National ID number. A link should be set up, between the civil registry containing the National ID database (at the Ministry of Interior) and the CBYs PCR, in order to match online, the ID supplied by the lenders and confirm its correctness.
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Table 15 SFD supported Microfinance Institutions and Programs, March 2009 Active Clients S/ Program N Number of Outstanding loan PAR portfolio % (Million YER) Cumulative numbers Area of operation Loan Number amounts of loans (Million YER) 3 0.1 0 0 52,622 26,131 12,703 22,060 1,713 Capital City,Taiz,Qaedah and Yarim in Ibb and Dhamar
Borrowers
Saver s
Total
Wom en %
Total
1 2 3 4
National Foundation
MF
12,132 5,005 3,561
99 14,856 33 100 92 930 3,832 5,731
266 170 74 62
MF Development Program (Nama*) Abyan S & C Aden Foundation Al-Awael Company Sanaa MF Social Institution for Sustainable Development (SFSD) Small Enterprise Development Fund Al-Hudaidah MC MF
1,121 Sanaa , Taiz , Aden 427 Abyan Dar Saad,Al-Buraikah, Al-Mualla, 25 Al Tawwahi, Crater Khormaksar, Sheikh Othman- Aden,Lahej 656 Taiz 670 Capital City
3,500
5 6
MF
3,116 2,365
100 82
0 1,947
56 57
5 16.7
30,718 18,516
2,378
87
97
8,455
463 Capital City
2,118
1,080
8,080
5,902 Capital City, Taiz, Aden, Al-Mukalla Al-Hudaidah city and Bajil Al-Hudaidah governorate
1,370 1,387
74 30
0 1849
13 50
N.A 10.4
30,161 6,277
729
10 Wadi Hadhramaut Al-Amal 11 Microfinance Bank 12 SOFD 13 Other Activities & IGPs
365 Seyoun Hadhramaut governorate
742
35
1,285
49
766
50 Capital City
417 NA 38,091
76 NA
0 NA 30,430
6 0 1,980
14.9 NA
9,235 27,926 253,650
195 Capital City 753 Several areas 12,316
Total
With regard to MFIs, only two (Al-Amal Microfinance Bank and Tadhamon International Islamic Bank) are regulated by the CBY. They are therefore mandated to supply information to the PCR. The residual 11 MFIs supported by the SFD are not under CBY purview, but they do possess a large number of records (38,091 clients as of March 2009), which information is not yet part of the PCR (Box 5). The value of this information for the credit system will be greater; therefore a legal and technical solution to accommodate these nonregulated MFIs in the credit registry sharing and inquiring mechanism should be pursued.
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In the future, other sectors that are currently not sufficiently developed will likely play a significant role in the credit system. Retailers, supermarkets, furniture and appliances merchants, as well as mobile telephone companies, and other similar lending segments, might progressively enter the credit market directly, acquiring an increasing share of consumer credit. They must be considered eligible to participate with full rights to a PCB scheme. This is a crucial issue since capacity to predict risk is given by data completeness (both negative and positive data) and by the participation of all regulated and nonregulated lending sectors. The CBY should encourage the set-up of an effective PCB along theses lines.
BOX 5: PCRs role and challenges In conclusion, the CBY should consider the PCR as an important transitional tool in a medium term strategy towards the development of a PCB in Yemen. International experience shows that, while public credit registries main purpose is being a paramount instrument in bank supervision and prudential regulation, they can also have an important preparatory role in facilitating the development of the private credit reporting industry. This role can be accomplished by promoting the establishment of complete, efficient and reliable private credit bureaus, by enabling a friendly legal framework, by creating awareness among lenders and social responsibility among borrowers, and by enhancing the confidence of the consumers through a deep, direct involvement in solving their complaints related to credit reporting activities.
The CBY has started a project aiming at significantly revamping the existing PCR. The main areas of improvement of the current system can be summarized as follows: 1. IMPROVE THE QUALITY OF INFORMATION In light of the decision to eliminate the YER 500,000 threshold in the system, the quality of the information is extremely important. Since the volume of accounts transmitted to the PCR and to be manually checked by the PCR staff will increase significantly, it will be difficult to efficiently manage such a growth without significant investment, and increase of staff, and resources. Therefore, to start with, the new National ID (NID) should be introduced as the primary PCR search key utilized for inquiries in the system. The NID is mandatory in Yemen for all citizens older than 16 years and the system can accommodate the NID. Financial institutions should be mandated to: i) always require the NID for any new account opened, and ii) always supply the NID for any transaction with the PCR (either incoming or outgoing). The PCR should refuse to store records inside the database or to answer to a users inquiry, unless the NID number is part of the request (for those types of customers eligible for an NID). These measures would strongly improve the data matching efficiency, the overall quality, and the consistency of the database, while decreasing manual checks and corrections made by the PCR staff and allowing the dissemination of more reliable data to the lenders. Administrative sanctions and penalties should be established and consistently applied when these standards are not met. PCR could suspend the service in case of recidivist users behavior.
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These provisions are important not only for the sake of the PCR but for a better harmonization of information flows in Yemen. The NID database at the Civil Registry Authority (Ministry of Interior) could be linked to the PCR, allowing cross-checking of NIDs provided by the users. 2. IMPROVE THE QUANTITY OF INFORMATION Existing regulatory framework should be systematically enforced (Articles 71 and 72 of the Banking Law n.38 of 1998) and/or new regulations issued to ensure the mandatory sharing of data with the PCR and referring to the PCR database before granting credit are complied with by the lending industry. This will warrant that the quantity of information inside the database really corresponds to the loans granted by the credit system. As mentioned before in this report, one of the fundamental concepts of modern information sharing is the Reciprocity Principle, establishing that only those users who provide the information are allowed to inquire from the credit registry. The Supervision Department of CBY would also have to introduce new audit procedures during on-site missions, exclusively implemented to check that lenders are fully complying with the regulations/laws on data provisions/inquiry, and supplying the whole portfolio. 3. ENLARGE LENDERS PARTICIPATION TO THE PCR Regulators should contemplate the possibility to enable MFIs to contribute data to and make inquiries from the PCR. MFIs are acquiring increasing importance in the lending panorama of Yemen, and the rising number of loans generated by this sector can constitute important information to avoid overindebtedness, and to define a complete financial profile of the Yemenite borrowers. For example, in the next five years, if growth estimates are respected, one MFI, namely Al-Amal will hold a portfolio of approximately 100,000 customers. Legal and technical issues would still have to be solved to allow the participation of MFIs to the scheme. However, the enlargement of the PCR to the MFIs contribution will dramatically enhance both the quality and the quantity of the database, permitting CBY to have complete control of all the current credit flows in Yemen. The SFD should support the effort by issuing a directive requiring all MFIs to request the borrowers consent, as part of the credit agreement, with immediate effect. Consent should dispose of the initial main legal obstacle to share data with third parties, and supersede the bank secrecy. 4. IMPROVE SYSTEM SECURITY AND TECHNICAL CONFIGURATION The implementation of some fundamental enhancements can improve the PCRs performance. These are: Set up adequate database back-up/s, sited in different location/s than the PCR main site. Define, test, implement, a thorough Disaster Recovery Plan to protect the system and the data, and
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ensure service stability in case of catastrophic events. Back-up the network telecommunications connection (contracting a second internet provider) in case of failure of the existing provider, in order to ensure business continuity to the users. Analyse system storage capacity to ensure that the system can accommodate all the information concerning loans below the threshold of YER 500,000, as well as historical records of the countrys financial system. The installed capacity devoted to accomplish this goal should have enough storage space for at least a complete 5 years historical cycle. Implement reliable and efficient security procedures, as well as regular upgrades, to prevent intrusions into the network/system and to pre-empt external attempts to corrupt the stored data or to interrupt the service. Protect the system and the back-up locations by meeting the minimum physical security requirements such as restricted entry, use of security devices (badges, passwords, biometrics, etc.) as well as smoke/ fire detectors, humidity and temperature control, double flooring, etc. Implement sufficient electrical operational redundancy (e.g. external generators and UPS). Adopt procedures to control and restrict the introduction and usage of communication devices (such as internet, e-mails, floppy disk drive units, CD writers), through which sensitive information can be pilfered. User IDs, passwords, time-out periods, audit logs, either about users or operations carried out within the software, must be constantly monitored. Produce monthly management control reports (e.g. users activity controls, hit-ratio, number of inquiries by users and cross-checks with accounts updates, etc.) Implement logic controls on the quantity of updates received, against number of inquiries made -in comparison with previous month/s. Run training section for the lenders personnel, to improve quality of information transmitted during inquiry, and to reduce manual checks and efforts of the PCR staff. 5. IMPROVE CREDIT REPORTS CONTENTS The mass of information contained in the database could be exploited to improve the contents of credit reports returned to users (currently providing minimal information in an aggregated format). Some ways to address this information deficit are: Historical data stored in the PCR database could be used for credit reporting purposes. Currently, only the most recent borrowers information is contained in the PCRs supplied credit reports. This could represent a major leap forward to enhance data quality, as historical information is extremely important to determine the true level of risk of a credit applicant. Some of the key account performance variables that are used to determine credit risk are the past due status and the write-off status. Debt arrears (past due) and credit write-offs should be shown in the credit report. These characteristics provide important indications of a borrowers credit performance. The PCR uses only the current authorized outstanding, the credit line utilization, and the lenders subjective classification to measure borrowers performance. Showing this additional information may probably require modification of the credit report layout and consequently, the
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necessity to intervene on the software. Furthermore, banks would have to be in a position to provide such data. Previous searches are currently neither stored in the PCR database nor shown in the credit report. This information (the number of time that lenders have enquired a borrowers record during a certain time period) is an important indicator of risk (credit shopping) for underwriting credit. This is currently unavailable, and could be created, as this information may also prove important to measure users compliance in providing updates - after the initial inquiries are made to the CBYs PCR. 6. ESTABLISH CONSUMERS RIGHTS TO PRIVACY OF INFORMATION Regulators should promote and encourage the protection of credit information privacy for individual consumers. When credit information about an individual is shared, some fundamental rights must be enforced and granted to the borrowers, like the right of individuals to view their credit report for free (at least once a year) and the rights to challenge and correct data within strict and clearly defined deadlines when the data is proved as false. Consumers should be able to ask and obtain their credit report both from the CBY and/or the lenders to whom they have applied for credit. 7. ESTABLISH A CONSUMER RELATIONSHIP UNIT A new Consumers Service Department unit should be set-up within the CBYs organization. This will have the objective of supplying advice and reviewing requests raised by consumers, while granting the above borrowers rights as established by the regulations. 8. ACQUIRE BORROWERS CONSENT Through a regulation, the request for borrowers consent on all loans, regardless of the credit typology and amount should be made mandatory by the regulators. Consent to share own data and inquiry credit registries should be prior, informed, open (allowing sharing/inquiries with public or private third parties), written, part of the credit application and stored under the responsibility of the lenders. A mutual effort of public (CBY, SFD) and private (YBA) institutions should be sufficient to encourage lenders to introduce the consent clause in each and every credit application/agreement, with immediate effect. 9. INVOLVE THE LENDING COMMUNITY It is evident that all the above upgrades, improvements, and enforcements will heavily involve the lending community. Regulators should engage lenders at a consultative level, creating a Credit Reporting Working Group (CRWG), responsible for defining future strategies to improve the information sharing system in the country. Tasks, responsibilities and deadlines should be mutually discussed and agreed between CBY and the lending industry. Subsequently any breach of the agreements should be sanctioned and penalties applied by CBY.
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3.5. PUBLIC INFORMATION SOURCES

Public information (e.g. electoral roll, civil register, tribunal information, telephone directory) are not abundant in Yemen. However, the complete register of new National IDs is available under an electronic format at the Civil Registry Department of the Ministry of Interior. A link between the PCR and the NID database, if established, would confer superior strength, matching capability, and more reliability to the PCR database.
3.6. OTHER STAKEHOLDERS

3.6.1. MINISTRY OF FINANCE
The Ministry of Finance (MoF) is the authority responsible for formulating policies and strategies concerning all financial government undertakings and all credit institutions, fully or partially owned by the government (Yemen National Bank, CAC Bank, Reconstruction and Development Bank, Al-Amal Bank, Housing Bank, etc.). Among the key objectives of the Ministry of Finance are: i) efforts to offer broader access to credit to the Yemeni population, ii) efforts to oversee and lead all the reforms concerning the credit industry proposing new legislation and enabling the legal framework. One of the major projects currently in progress at the MoF is the revamp and the possible privatization of the only remaining public sector bank, namely, Housing Bank. To this end, one of the proposals being considered is to massively increase its network and its territorial coverage, by merging it with the Post Office network and making financial services, (particularly retail services), broadly available to mainstream consumers. The Ministry of Finance is also the authority concerned with Public Enterprises (PEs) development . These are generally large government undertakings, for which the MoF becomes the principal vehicle of financing, though PEs can be granted credit by private commercial banks. Generally, PEs financial result is not extremely satisfactory - though a fistful are profitable. For this reason, different privatization strategies are considered by the MoF for varied sectors and companies. A 1997 reform established that PEs balance sheets should have been made healthier; the old bad debt cleaned, following which companies should have been privatized. For several reasons, however, this process has been delayed. The MoF is tirelessly working to achieve this objective with the support of multilateral organizations.
42
3.6.2 MINISTRY OF INTERIOR

The Ministry of Interior (MoI) manages the new National Identification database (containing the unique and definitive identification numbers that should be provided to each and every adult citizen in Yemen) as well as other public information registries (e.g. civil registry). This responsibility stays with the Civil Registry office at the MoI. The Government aims at replacing all the old and varied identifications currently circulating in the country, with the National ID number (NID). The NID is a unique, definitive,
42
67 public sector enterprises remain in Yemen
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more reliable, and more difficult to forge piece of identification. The NID replaces the previous system of national identification that was not completely electronic and online, and it is the precursor to a future identification system (smart card based), which while maintaining the same NID number, will be utilized for broader scopes e.g. health, tax systems, etc. The MoI estimates that nearly 30% of the population has already received the NID, and they are willing to support any joint effort allowing a quicker penetration of the NID, for e.g., mandatory NID requirement to open a bank account. The existence of such a system is of high relevance for any credit information process, either public or private, and should be proactively supported by the regulators.
3.6.3 YEMEN BANKERS ASSOCIATION

The Yemen Bankers Association (YBA) institutionally represents the credit industry of Yemen. Its Board, chaired by a rotating President, is entrusted by banks to pursue projects and implement policies for the common good of the sector. The most essential intervention, carried out by the YBA in the domain of credit information sharing, is a planned project to develop a Private Credit Bureau (PCB) limited to the exchange of information among banks. The YAB, in charge of implementing the project, has requested the CBY for an authorization to establish the first PCB in Yemen. The CBY has authorized project implementation. However, this was delayed to ascertain whether the new announced CBYs PCR could fulfill the informational and technological requirements of the industry. The Yemen Association of Banks can be the engine for the set-up of a state-of-the-art private credit information system; however, as already discussed, it is advisable to not set-up separate systems/databases catering for the needs of only one lending sector.
3.6.4 SOCIAL FUND FOR DEVELOPMENT

The SFD was established by the Law No. 10 in 1997. The SFD's major function is to proactively contribute in implementing the government's economic and social plans, by means of increasing access for individuals, households, micro-enterprises, communities, the poor and low-income groups to employment, production and social services. The SFD aims at providing the poor with development opportunities, using and promoting innovative participatory approaches in delivering basic economic and social services . The SFD is particularly engaged in the microfinance and SME sectors. It is estimated that the number of SMEs are around 311,000, employing roughly 500,000 workers, of which 224,000 are individual entrepreneurs. The investments made by these enterprises represent nearly 72% of the total investments made in Yemen . The SFD has become one of Yemen's main development actors; it participates in the implementation of the national poverty reduction strategies and contributes in achieving the national sector goals and the Millennium Development Goals. The SFD does not overlap with the policy, planning, or implementation functions of the ministries, and its scope of intervention is limited to
44 43
43 44
http://www.sfd-yemen.org/ http://www.sfd-yemen.org/
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national development plans and public investment programs. The SFD has become an effective tool for the public sector to reach the poor and society's vulnerable groups .
Figure 25: SFD Organization Structure
45
Prime MinisterChairman Board of Director
Managing Director
Internal Auditing Director
Monitoring and Evaluation Director
Programming
Finance and Administration
Information Technology
Technical Support
Education
Cultural Heritage and Rural Road
Water and Environment
Agriculture and rural Development
Health and social Protection
Training and Organization Support
Small and Micro Enterprise development
Branch Offices
3.6.5 POST OFFICE COMPANY

One of the most efficient and widespread financial services channels for small depositors is represented by the Post Office network, with over 250 branches, widely and evenly covering the countrys territory. The PPSC (Post and Postal Savings Corporation of Yemen), with a customers base of over 63,000 depositors as of June 2008 , offers simpler and cheaper procedures than the banking system does to new customers. Its lower requirements (e.g. a postal savings account can be opened with a minimum balance of US$1.25), facilitate the financial inclusion of the poorer and rural segments of the population. A World Bank analysis
47 46
shows that in 2005 the average deposit tracked at the PPSC was US$ 81.25.
The PPSC does not offer any loan or credit product yet.
45
http://www.sfd-yemen.org/ Social and Economic Development Group MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008 47 CGAP, Multi-Donor Mission: Microfinance in Yemen, 2005, and Social and Economic Development Group MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008
46
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3.6.6 MONEYCHANGERS
A long-established and commonly utilized channel for financial services is represented by money changers and bureau de change. As per CBYs statistics, there were 521 money changers operating all over the territory as of end 2006, compared to 465 in 2005.The main activity carried out by these financial intermediaries is the exchange of foreign currencies. They do not offer any other type of financial services. Money changers are licensed and supervised by the CBY, which they have to provide with periodical activity reports. However, in practice, it is difficult for the Central Bank to perform a punctual supervision of this category of intermediaries. Generally, money changers hold accounts with the commercial banks, through which they can settle their cash transactions.
3.6.7 PENSION FUNDS

Pension funds are important players in the Yemen financial market. These institutions operate in the market with substantial liquidity - generally investing in government treasury bills - as a result of some existing restrictions to limit and mitigate investment risks. Therefore, based on sufficiently safe investment, and marked by interesting yields, the pension funds financial performance has been quite satisfactory, and apart from some losses suffered during the 90s - generally rewarding for members. Pension funds cover all the public employees, including the army, as well as some private employees. A revision of the current system will probably be necessary in the short term. Currently, pension benefits and payments correspond to 100% of last salary paid to the worker after 35 years of contributions. However this may cause imbalances to the funds in the future, especially if coverage is expanded to current employees not being covered, and if average life expectancy increases. A larger role and participation of the private sector in the pension system should be considered.
3.6.8 LEASING COMPANIES

Though Islamic financial transactions are becoming quite popular and despite leasing being symbiotically related to Islamic finance, these financial transactions are generally infrequent in Yemen. Typically, the only deals are represented by some Ijarah transactions (a form of financial transaction similar to leasing, but in line with traditional Islamic finance) offered by some Islamic banks . No appropriate legal framework existed, and this represented the main obstacle for development of leasing - until a new Law was passed in May 2007. Many banks have shown interest in entering this new financial sector, however some issues still hamper the expansion of this important financial service (e.g. the tax treatment of leasing is still unclear and penalizing, when compared to other transactions).
48
48
Social and Economic Development Group MENAs Financial Sector Review, Yemen Financial Sector Reform: a Proposed Action Plan, 2008
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3.6.9 COLLATERAL REGISTRY

No Collateral Registry is currently operating in Yemen. A collateral registry contains data concerning movable and immovable properties which helps lenders to expand the types of collateral and consequently increase access to credit for clients. However, certain types of collateral, such as land or real estate, cannot be exploited. Business firms cannot utilize most of their movable assets, including equipment inventory and accounts receivable, as collateral for obtaining financing.
3.6.10. STOCK EXCHANGE

A project to develop the countrys first Stock Exchange, enlarging financial markets as well as funding alternatives for corporations, is under government consideration. A special unit at the MoF in charge of the securities market is responsible for the project with international support and cooperation. The new exchange is expected to be operational by 2011. The securities market of Yemen is small, informal and limited to the exchange of treasury bills in the primary market. In July 2009, the issued government bonds totaled YER 25.4 billion (USD 124.5 million), while the total outstanding debt was YER 307.1 billion (USD 1.5 billion) . Bond yields in July 2009, ranged from 12.95% to 12.97% (for three, six, and twelve month bonds). The rise of an active market for bonds, securities, and corporate bonds, with a longer maturity, aimed at promoting individual stock trading is desirable, and should be pursued. However, a regulatory framework will have to be developed to enable this process, along with undertaking awareness raising amongst the public.
49
49
Central Bank of Yemen, Review of Monetary and Banking Developments, July 2009
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4. STATUS OF LEGAL FRAMEWORK

4.1. CREDIT REPORTING LEGAL FRAMEWORK GUIDELINES
It is advisable that credit reporting, particularly when the private sector is involved, is regulated through specific legislation. The guidelines are based on international legal best practice for the credit market.
4.1.1 SUPERVISION
PCBs should be supervised, particularly in those markets where the traditions of data protection and information sharing are not recent or significant. However, this gives rise to the question about who should regulate PCBs. There are several solutions: i. In regions/countries with Data Protection Laws (e.g. E.U., Argentina), the role is generally performed by the Data Protection Agency, a watch-dog authority purposefully established with oversight that is not just limited to PCBs; ii. In countries where ad-hoc credit reporting laws/regulations have been enforced recently (such as Kazakhstan, Russia, Kenya, Tanzania, Peru, India, Ecuador, Honduras, Ghana) the regulator is typically the Central Bank; iii. In those countries where neither of the above is present, and since credit reporting is usually not prohibited by existing laws, PCBs have generally begun operations on the basis of self-regulation (Code of Conduct), but in strict consultation with banking supervisors. For example, the Saudi Arabia Monetary Authority (SAMA) encouraged banks to start a bureau on the basis of the Code of Conduct, to learn from experience. Later it developed regulations that would fit practices within the country. In this case, the critical role of the Banking Supervisor which encouraged establishing a PCB is noteworthy.
4.1.2 LICENSING
Approaches and trends greatly vary across countries. In some countries, such as Germany and Russia, registration and not licensing with the authority is required. In another set of countries, such as Mexico, Morocco, Thailand and Kazakhstan, licensing is required, while in Hong Kong and Australia, credit bureaus are not licensed but are required to operate in accordance with the Code of Conduct endorsed by the authority in charge of data privacy. Finally, in some countries- generally those with a solid, longstanding information sharing tradition - such as the U.S., neither licensing nor registration with the enforcing authority is required for a PCB. However, this represents an exceptional situation, and requires a friendly, regulated, conscious and more sophisticated environment.
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4.1.3 HOW TO DEAL WITH BANK SECRECY

Bank secrecy is frequently cited as one of the major culprits in inhibiting the establishment or the expansions of information sharing. Often, even simple misinterpretations of the legal framework may be detrimental to the start-up of a PCB. Nevertheless, balancing bank secrecy and information sharing is not impossible, and the fast growth of credit reporting worldwide, fully functioning even in countries with the most rigid bank secrecy, like Switzerland, is a manifestation of this possibility. There are various legal approaches that regulators interested in the development of information sharing and in the benefits deriving to the financial systems, can take, in order to comply with bank secrecy provisions, while fostering a full, functional credit reporting industry. Following is an analysis of the most common methods: i. Open Consumer Consent and Code of Conduct: This is an effective operational solution, though it is suggested as an interim step, towards the creation of a comprehensive legal framework. It has been adopted in many countries where neither a PCB regulation has been issued by the banking authorities, nor a specific legislation was present. Consent must be unrestricted, allows sharing with either PCR/PCB, or other lenders/parties and should be included in the credit application, such that, the consumer is in a position to decide whether sharing information is a convenient option. Generally, a standard Code of Conduct accompanies the consent utilization. In certain countries, consent is requested for sharing data and inquiring PCBs. In other countries, where contributing information to the PCB is mandatory, consent is required only for inquiries. Consent (written or digitized) is given for a specific, limited purpose (e.g. credit granting), and may take several different forms. The most common options are: a. opt-in clause: explicit will to share information expressed by the customer; b. opt-out clause: tacit, undeclared approval, valid unless the customer voices his/her refusal; c. Separate clause: a separate document, expressly mentioning consent form and its contents. ii. Banking Supervisory Authoritys Regulation: This is a more structured solution that can combine speed of approval and enforcement, while disposing of the impediments created by bank secrecy to the development of credit reporting. Coupled with the compulsory customers consent, it proves to be a quick-win solution. Basically it consists in an ad-hoc compendium of norms, not a law, enacted by the banking authorities (Central Bank, Superintendence), aiming at regulating information sharing and including clear consumers rights - as well as lenders and PCBs duties. An interesting example is the recent regulation passed by the Central Bank of Egypt, which the PCB now reports to. In those countries where banking authorities have the power to draft, approve, review, and amend such norms, this solution is fast, practical and effective.
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iii. Credit Bureau Law: The enforcement of a specific legislation regulating PCBs is another prevalent approach adopted in many countries and leads to the establishment of well-structured information sharing systems. A customized and succinct law represents the best foundation for information sharing, prevents excuses and misinterpretations about its legal viability, establishes unmistakable consumers rights, and allows a healthy development of credit reporting. Typically, though, this solution requires longer approval time. iv. Data Privacy Law: A further in option, the mostly countries
Figure regulation of private credit bureaus Figure 25: Growing26: Growing regulation of
Regulation of private bureaus (% of countries) Specific law for credit bureaus Banking law governs credit Data protection law
84
adopted
Private Credit Bureaus Regulation of private bureaus (% of countries)
belonging to the OECD area, is the enforcement of a Data Privacy Law, containing clear provisions on confidentiality of data that also apply to credit information and, by default, regulate PCB activity. As can be seen in Figure 26, this solution is generally adopted in countries where there is solid experience sharing, about where
Rich Middle Poor Income 10 8 10
26 In force Under development
Code of conduct for data use
24
5 48
19
7
2 10 2 3
13
5 2 Rich Middle Poor Income
Rich Middle Poor Income
Rich
Middle Poor Income
information
consumer credit is highly developed and typically, the other solutions have already been previously and modularly implemented.
4.2 LEGISLATION IMPACTING CREDIT REPORTING IN YEMEN

In Yemen and its current legal environment, the laws/regulations that may allow, prohibit, or hold back private credit information sharing are the following: i) ii) Banking Law (No. 38 of 1998) The Law of the Central Bank of Yemen (No. 14 of 2000)
iii) The regulations impacting credit reporting issued by the CBY. There is no other legislation present in Yemen that may influence establishment of credit reporting (e.g. Data Privacy Law). The current legislation is sufficiently clear about the duties, responsibilities and roles of CBY and the banks to establish a Public Credit Registry for sharing and disseminating information amongst them, and less so about the set-up of a private information sharing scheme. Therefore, the current legislation should not be considered as an obstacle towards credit reporting among financial
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institutions. Consequently, private credit reporting could be established whenever the credit industry decides to proceed, by applying standard solutions from other markets.
Banking Law clearly establishes the authority of the CBY to request credit information from supervised entities, i.e. banks. The latter must periodically contribute data to the PCR. Article 28 Paragraph 1 clearly mentions that: ..all banks shall submit monthly statements to the CBY no later than the 15 drafts and their assetson the last day of the previous month
th
of each
monthindicating their assets and liabilitiestogether with a breakdown of the position of loans, discounted
The mandatory character of this contribution is reinforced by Article 25 which establishes what information must be contributed and when. Further to Paragraph 1: all banks and other financial institutions recognized by the Central Bank shall submit a monthly report indicating the following: Balance of credit provided. A list of loans and facilities of YER 10,000,000 and collateral provided. A list of overdue loans that have not been paid for more than 90 days and the amounts of overdue payments. Another effect of this article is to enlarge the provisions to other financial institutions recognized by the Central Bank which, if the law is interpreted in a flexible manner, can make the participation of microfinance institutions possible and easier. Though the information requested by law, is limited to the above categories, the law gives an unrestricted power to the Central Bank (Article 28 Paragraph 2) to require any information, from any bank, hence providing the opportunity, as an example, to reduce the threshold on loan amounts and request consumers loan data. Furthermore, CBY is mandated to compile information under the form of aggregated data. Article 25, Paragraph 2, indicates that the Central Bank shall prepare a combined statement of the credit facilities providedwithout mentioning the name of the bank providing such information. This is reinforced by the contents of Article 28, Paragraph 3 which states that: the Central Bank shall be responsible for the compilation of consolidated data combining the figures given in the statements submitted under Paragraph 1 of same article The law also clearly authorizes the dissemination of the compiled information from the Central Bank to the supervised financial institutions; however, it places some limits and boundaries for disseminating the data to lenders and other third parties, as indicated below:
50
and greater, with recipients name, maturity date
50
This threshold has been gradually decreased and no longer applies.
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Article 25, Paragraph 3, states: All banks and institutions recognized by the Central Bank shall have the right to review the combined statement on any customers requesting credit facilities from them
Paragraph 4 states that the Central Bank may distribute monthly to all banks the list compiled under the provisions of Paragraph 1 indicating customers with credit facilities of more than YER 10 million, that are in arrears for more than 90 days.
Some conflict seems to arise with Article 28 Paragraph 3, when the law states that: figures incorporated into the detailed statements (prepared by CBY) shall be considered confidential information restricted to each individual bank and the CBY.
The above provisions, if taken in isolation, seem to exclude the dissemination of positive information limiting it to negative data only. In addition, apparently, it seems not to allow sharing of information among a pool of lenders, but it restricts it to an individual relation between the Central Bank and each individual bank. Nevertheless, the law introduces one important exception that represents a definitive solution to the above issues, and allows full sharing of complete information, both positive and negative, which is nonfragmented from/to any supervised entity recognized by the CBY, dependant on the consent of the borrower/consumers. In fact, Article 84, Paragraph 2, clearly establishes that: the Central Bank may publish completely or in part at such times it sees fit, any information or data supplied to it pursuant the provisions of this law, on the condition that it publishes no information or data revealing the private affairs of any particular bank or customers of a bank without the prior agreement in writing of the party concerned. Moreover, the law establishes in the same Paragraph 2 of Article 84 that consent is not required for all loans exceeding the old threshold of YER 10,000,000 (subsequently reduced to YER 500,000). A possible limitation could be the need to have both the consent of the borrower and of the bank (party concerned) before sharing data below this threshold. In conclusion, as long as the consent of the borrower (prior, open, written, full, and part of the credit application) is systematically requested, the CBY and the Yemeni lenders should encounter no problems in sharing full information on borrowers without any limitation, as is the practice with the new PCR. Thus, based on the same principle (prior, compulsory borrower consent granted with any loan agreement) it appears possible that private information sharing schemes, such as PCBs, could also be started among regulated and non-regulated entities as well. In fact, this solution has been implemented in other financial markets where credit reporting is not governed by specific legislation or regulations yet, but is purely based on simple borrowers consent, allowing lenders to share data and to make inquiries through third party agencies, i.e. PCBs. Having said that, more in depth research and analysis are required to
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unambiguously establish the power of this norm in Yemen, and the advice of a local reputed legal firm should be requested before any private information sharing system is considered. A consent model solves the confidentiality concerns present in the lending system as it supersedes bank secrecy. Borrowers consent is a mechanism that puts power of information in the hands of the subject of information, permitting them to decide whether the sharing is in their interest or not. Most bank secrecy laws are superseded by the borrowers consent and this permits lenders to share customer information with third parties, if the consent is present. Relevant importance should therefore be given to the necessity of always collecting a written, open borrowers consent. This clause should be embedded in all credit applications, and requested with generalized and simultaneous procedures by all lenders. The possibility to increase participation of non-regulated MFIs in the PCR should be considered. This could be achieved through the potential relaxation of general rules, introduced by Article 25, Paragraph 1, regarding the possibility for other finance institutions recognized by the CBY to share information (with borrower consent). This could represent an important change allowing data sharing amongst all lenders. The main purpose of these norms would be to enable a legal and regulatory framework that covers all aspects from licensing to operations, shareholding pattern, governance, data collections, security of data, permissible purposes, etc. The legislation should harmonize the interests of the individuals, the intermediaries, the databases, and the users of the information. Above all, individuals should possess a guarantee to their privacy rights and accuracy of the information, as well as the proper use of their information. The Law of the CBY (n. 14 of 2000) reinforces the contents of the Banking Law with the following norms: Article 45, Paragraph 1: Any bank or specified financial institution shall provide the Central Bankwith any information or statements it requires Article 45, Paragraph 2: the Bank may publishthe information provided pursuant in Paragraph 1it shall not however publish any information revealing the financial situation of any client, bank or specified financial institution, unless it receives prior consent in writing. Article 45, Paragraph 3, establishes that not providing data is a violation and Article 46, Paragraph 2, quantifies the penalties. In no place, other than a reference in Article 13, Paragraph 5, (the Board shall have the following particular duties and responsibilitiesapproving all regulations, guidelines, and instructions that are to be
The final objective of the regulators in Yemen should be the establishment of an appropriate legal and regulatory framework without which the development of a credit information industry will be slow, particularly if considering the establishment of PCBs. In the long run, the absence of clear legislation can create uncertainty for potential information providers, end-users, individuals and authorities, and also lead to a disorderly situation in the marketplace.
BOX 6: Need for a Legal Framework
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issued by the Bank) is the Central Bank empowered to issue specific regulations like the one necessary to establish Private Credit Reporting in the country (e.g. license, supervise PCB). CBY has issued credit reporting regulations (n. 28877 of April 2000; n. 54064 - 55858 - 58912 of July 2006; n. 26222 of April 2007; n. 42589 of June 2008; n. 28282 - 28270 of March 2009; n. 25000 - 25429 - 25579 of April 2009; and n. 34746 of May 2009) making the following mandatory: i) ii) the request of borrowers consent (part of the credit agreement). the enforcement of consumers rights to request their own information.
iii) the elimination of the threshold (YER 500,000) and the sharing of all information. iv) the provision of all information on all loans and all customers (including retail and MFI banks loans) as of June 2009, within certain deadlines and in specific format and contents. v) the lenders mandatory inquiry to the PCR before granting any type of credit. These regulations reinforce the contents of the current jurisprudence (Articles 45 and 46 of CBY Law) and request lenders to adhere to basic norms to facilitate the deployment of an effective credit reporting system and form the basis for a future private sharing scheme. Lenders should be required to fully comply with the above instructions through periodical audits and applying sanctions where appropriate. It is paramount that any legal and regulatory credit reporting framework in place provides consumers with specific tools to manage and protect their participation in the credit reporting system. Unfortunately, these are not in place in Yemen. Therefore, the following specific items should be explicitly addressed in the rules and regulations dealing with credit reporting activities and/or related consumer protection: i) The consumer protection rules for credit information registries should be clearly specified. This protection should be equal for both the public and private credit registries. There is neither a specific authority in Yemen, today, dealing with complaints on data privacy, nor exists a regulatory framework or specific procedures and processes to deal with complaints related to credit reporting activities apart from CBYs regulation. ii) Consumers and firms should have free access to their own credit reports at least once a year, and also in case of dispute and adverse action. It is generally recognized by the credit reporting industry that consumers are in the best position and have the strongest incentive to assess the accuracy and completeness of the data contained in their credit reports. iii) They should also be given the right to obtain a free report from the lender or the PCB, in all these cases. Notification should include specific instructions on how to obtain their credit report (free of charge) and consumers rights with respect to challenging information they believe to be inaccurate or complete. iv) Consumers should compulsorily be notified when an adverse action (e.g. denial of credit, refusal to renew a credit line, etc.) has been taken as a result of information contained in their credit report, regardless of the source of information (public or private registry). v) Clear procedures, deadlines, and responsibilities of lenders and credit registries, in dealing with consumers complaints should be established. Time limits should be unequivocally indicated and applied.
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Also, a fast mechanism for disputing and correcting wrong or false data should be immediately available for consumers.
4.3 BORROWERS CONSENT

Borrowers consent to share data with and inquire into PCR/PCB is not always requested by all the lenders in Yemen, despite the requirements of Law. . This is possibly due to the limited number of loans and the culture of freely and legally sharing loan information above the threshold of YER 10,000,000 (for which the
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BOX 7: Borrowers Consent The immediate implementation of borrowers consent clause will allow utilization of historical information when a PCB is established. This will facilitate the development of the PCB and also make the exchange of historical data between CBY and a new PCB possible.
law does not require consent). But the scarce availability of credit to consumers, lack of an established data privacy culture among lenders and consumers, and lack of awareness about the importance that consumer consent can play in establishing a sufficiently reliable regulatory framework for credit reporting, do play an important role in the scarce consideration given to borrowers consent by the banking system. MFIs generally do not require this authorization from the customer. Even when consent is collected by lenders, it is restricted to data sharing with the CBY only, and is not an open consent data sharing with third parties, i.e. PCBs. Lack of borrowers consent on loan agreements, may impede the creation of a large PCB database, preempt the utilization of payment performance data, return a very low hit-ratio, diminish the initial efficacy of a future PCB, and delay the development of value added services. Though today consent may not seem a crucial issue, it will become a vital necessity for inquiries on individual customers in the future. The Banking Law is clear; consumer information can be shared only in the presence of consent.
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which would allow
4.4 NATIONAL IDENTIFICATION NUMBER

An effective electronic identification system, the new NID, has been established and extended to all citizens who must request the new National ID card after completion of 16 years of age. The NID is composed of 11 digits (the first 3 digits indicate the governorate; the 4 digit indicates the sex, while the remaining 7 digits are a serial number given centrally). No check digit is part of the NID. This identification system is a crucial asset for the development of efficient credit reporting systems; both public and private, and an excellent foundation for building a reliable and homogeneous database. However, inquiries transmitted to the PCR do not consistently contain the NID number. Several pieces of identification are used by banks as a component of the search key. This creates inconsistencies in the data and produces extra work for PCR staff.
th
51
Law 38 of 1998, Banking Law, Article 84.2 and the subsequent CBY regulation n. 58912 of 22nd July 2006, and 25579 of 28th April 2009 52 Written borrowers consent given to the lender to share data with any third party or lender, and not only with one party (e.g. with the CBY only).
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5. CONCLUSIONS
5.1. A STRATEGY TO ENHANCE YEMENS NATIONAL CREDIT REPORTING SYSTEM
International experience has proven that the lack of a strategic approach to solve financial infrastructure issues not only negatively influences the success of individual projects underway but also affects the quality of the financial infrastructure to the detriment of the economy. If common strategies among the public and the private sector are not defined and agreed, credit reporting systems may, at best, only achieve a fraction of the results to achieve an overall national objective. The scope and complexity of developing and successfully implementing a strategy for credit reporting systems modernization should not be underestimated. Credit reporting systems involve a broad spectrum of public and private stakeholders, especially when they include retailers and utilities data in addition to the banks / financial institutions data. Thus, a credit reporting reform agenda should include stakeholders such as consumer protection agencies, information providers, public sector entities, lenders, and banking supervisors. Consensus on a strategic approach is crucial to develop a holistic view of all aspects of the nations credit reporting system needs, and the possibility to satisfy them in an orderly and cost-efficient manner. A collaborative approach, with the active participation of all stakeholders, is always desirable because of the complexity of the required changes. The inputs given by service providers, users, technology partners, legal experts, as well as a well-structured collaborative approach will create synergy, stimulate learning and provide a basis for optimizing benefits through cooperation and consensus building. In Yemen, the most visible and important development is the revamp of the PCR which is an indispensable tool for credit risk management and evaluation. The enhancement has triggered the formal sharing of positive credit information, including small ticket loans. At present, only banks are part of the sharing mechanism. The revamp of the PCR, however, is on-going. Therefore, the positive impact has not been fully realized. There are clear symptoms of a market where information flows are not fully effective and complete. These include high reliance on guarantees/collateral, low credit penetration, high NPLs, uniform interest rates not based on individual risk, conventional risk management procedures, manual subjective decisions, crowded decision committees, and the absence of real competition among lenders. Furthermore, it must be considered, that in the future, other lending sectors will most probably play an increasingly relevant role in the credit system. In the short-term, it is recommended that the current PCR system is enhanced to accommodate the immediate needs of the lending industry. For the medium to long term, a solution that relies on establishing a PCB should be envisaged. The PCB should be tasked to create a private credit reporting system, totally financed, operated and managed by the private sector, thereby reducing the massive financial and operational burden on CBY, and allowing the CBY to focus on supervision
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of the credit system. In the medium term, the CBYs objectives should be to: support the establishment of an advanced, private, integrated full-file information sharing system. eliminate legal constraints that may exist for the creation of a PCB. enforce an appropriate legal / regulatory framework. delegate to the private sector the service of information provision to lenders. continue to collect data from regulated financial entities for internal purposes and tasks. close the PCR to lenders inquiries. become the Supervising Authority of the PCBs based on the powers to be given to CBY under the new regulatory framework. In conclusion, the CBY should consider the existing PCR as an important, preparatory step in a phased strategy towards the development of a state-of-theart PCB System in Yemen. To recap, for establishing an effectively functioning information sharing system in Yemen, a strategy marked by the following milestones could be pursued: Begin working, together with the lending community and other stakeholders, towards the establishment and utilization of an effective national credit reporting infrastructure that will become a vital prerequisite for responsible and reliable credit granting. The chosen final solution should allow the exchange of all positive and negative credit information (full sharing system) among regulated financial entities to start, but open to eventually contemplate the future participation of other lending sectors, non-regulated as well (non-fragmented system). Different information sharing schemes/solutions (e.g. public / private) may be adopted, in different phases though it is advisable that it is the private sector that operates the credit reporting system, as amply demonstrated by international best practice results. Given the size of its population and potential market, Yemen may be in a position to attract specialized providers in the future - should its credit industry continue achieving a steady growth. However, this will take place when credit volume growth can justify the significant investment required, to develop a PCB, i.e. the presence of a solid legal environment, a culture of information sharing among borrowers/ lenders, and sufficient historical information available in the PCBs database. Three to five years is a reasonable time span for the above development. In the meantime, it will be the CBY through its PCR that will serve the information sharing and credit reporting needs of lenders. Therefore, it is advisable that a staggered approach to full credit reporting is followed, with an initial step (Phase 1) in which the CBY continues to be the provider of information to the credit industry,
Lending institutions and CBY will benefit from the existence of a private reporting system by getting all the information required for supervisory and credit assessment purposes. Without considering that the PCR may become both the biggest competitor of potential PCBs and the most significant obstacle to the development of a competitive and open information sharing industry in Yemen, unless the implementation of the above strategy is considered. BOX 8: PCRs Role in the Future
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enlarging its scope to the microfinance sector as well. In parallel, a strategy second step (Phase 2) must be planned to attract private information providers in the medium-long term, allowing the definitive hand-over of information provided from the public to the private sector. Regulators should consequently continue to pursue their existing plans to upgrade the Public Credit Registry. Information impact will not be limited to support lenders risk assessment, but exhaustive and first rate information will also be required by the regulators for supervision, monetary policy definition, statistical purposes, and existing international reporting commitments. In Phase 2, the establishment of an efficient and modern Private Credit Bureau should be fostered, allowing regulators to delegate the considerable task of becoming a specialized information provider, which is not part of its institutional role/responsibility, and which could create unjustifiable operational and financial burdens to the CBY with regards to investments, structure, staffing, and relations with the borrowers. If possible, more than one PCB should be licensed, to avoid the establishment of an inefficient monopolistic information industry. Upon establishment of the PCBs, it would be desirable that regulations confirm the rules for lenders to: i) share information with PCBs, and ii) inquire from PCBs before granting credit - always with borrowers consent. In addition, the PCR should be closed to lenders inquiries. Lenders would then have to automatically switch to and consult the existing PCBs . However, the PCR should continue to collect full information from the lenders and utilize it for the CBYs internal purposes only. The role of regulators in respect of PCBs and credit reporting would remain nevertheless crucial, qualitatively more important, and determinant for the establishment of a sound, solid, reliable information sharing system. In fact, the CBY should be the authority delegated to grant licenses, to regulate and to supervise PCBs with a particular inclination to the protection of borrowers rights, while monitoring that the sharing and dissemination of the information comply with the existing legislation and norms. A friendly and clear legal framework must be in place in order to give CBY effective tools to exert the above role, but also with the objective of eradicate any impediment to a complete sharing of information, therefore attracting foreign investment and skilled technical information providers, while granting full privacy and protection to consumers. Legal framework should also regulate and set guidelines for PCBs licensing and operations, consider the minimum security standards, the data exchange responsibilities, consumer rights, the responsibilities of PCBs and lenders, as well as eventual sanctions for violations. Regulators should already begin to work towards enabling a sound and bespoke legal framework clarifying the rights and/or obligations of credit information providers, users, consumers, and authorities alike. To facilitate the above tasks, the involvement of the YAB and the SFD is paramount, as it would allow the CBY to deal with strong reliable partners, facilitating the decision making process and permitting
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53
While the PCB/s would be able to develop and provide Value Added Services, as well as the most upgraded security systems and standards, (thanks to specific expertise, international experience, and to the vast global investment made in the credit information sector worldwide) this would be extremely difficult for the CBY, as for any Central Bank worldwide
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adherence to the general international credit industry standards. In parallel, the diffusion of advanced credit and payment systems becomes of fundamental importance to stimulate consumer credit. The utilization of plastic money and basic credit products, through pilot projects with large inclusion, is one of the most effective and fastest ways to improve penetration of new credit services, increase their utilization and appreciation, while fostering a faster propagation of a new credit and credit information culture among consumers. To complement, lenders should robustly invest in internal training programs, building capacity on new risk management and up to date portfolio monitoring solutions (credit bureaus, credit scoring, scoring monitoring, etc.). Financial education should be extended to consumers, aiming at nurturing a deeper understanding of credit, credit products, credit concepts, credit information, and consumer rights. Finally, it is recommended that the Credit Bureau Working Group is created with the objective to outline the strategy for the establishment of the future national Credit Reporting System, stimulating local interests and providing a basis for discussion with key Yemenite stakeholders, donors, international agencies, and multilateral organizations, and facilitating the agreements on a number of policies, legal, organizational, technical and operational issues, to strengthen the PCR activities in Phase 1 (PCR) and envisage the components of the potential Phase 2 (PCB).
5.2 COMPARING EXISTING AND IDEAL CREDIT REPORTING MODELS

The following table emphasizes the major differences between the current PCR exchange of information and a standard PCB built on best practices.
Table 16: Differences between PCR exchange of information and PCB Relevant Aspects CBY PCR (current situation) Only regulated entities (currently only banks) No retailers No credit cards No Micro credit institutions non-regulated No mobile telephone companies No utilities STANDARD PCB (future potential) The system is generally characterized by a multi-sector sharing platform that can be fed by banks, MFIs, NBFIs, and ultimately by each and every other regulated and/or nonregulated sources/users, either public or private, financial or commercial
Information providers
Information contributed
Lenders forced by Code of Conduct and reciprocity principle Basic portfolio outstanding figures on business to share all information, on all types of loan, on all customers firms and some consumers A PCB generally disseminates all information on all types of loans, on all customers, under a detailed format at a single account level (trade lines), including previous payment pattern, previous searches list, history of arrears, worst arrears, total arrears, etc. A PCB, complying with local legislation, generally shares the last 3-5 years of full historical payment performance
Data returned to Aggregated, limited, partial lenders
Historical data
No historical data returned
No legal/administrative responsibility Duties and concerning the quality and quantity of the responsibilities information shared of users /data No Code Of Conduct enforced providers No sanctions applied Value services
Accountability for data quality and completeness Reciprocity principle enforced Penalties applied in case of misconduct and non compliance Code of Conduct enforced Possibility of service suspension Possibility of revoking service added No internal capacity and skills to develop Value Know-how, and international experience, vast capacity to Added Services develop sophisticated services (scores, tracing systems, fraud
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Table 16: Differences between PCR exchange of information and PCB Relevant Aspects CBY PCR (current situation) Relatively limited expertise Limited training possibilities STANDARD PCB (future potential) systems, etc.) Internal capacity building to run the PCB in parallel with maintenance, support, training as a result of international expertise and know how A PCB must set-up an operational internal Consumers Support a Unit (CSU) Toll-free telephone number to be implemented Web-site to be implemented Borrowers consent to share data and inquire the PCB mandated by law Right of borrowers to obtain a free credit report once a year Right of consumer to dispute information contained in the PCR and to have it corrected, if proved wrong, within enforced deadlines Lenders obligation to reply to borrowers requests within the established deadline in case of dispute Central Banks paramount role in ultimately ensuring that consumers rights are respected by lenders Financial literacy campaigns among borrowers, about their rights, promoted by the PCB Routine Central Banks supervision and audits over quality and integrity of data, security, compliance with the law performed by the authorities Utilization of data only for permissible purposes monitored Sanctions applied in case of non compliance
Internal capacity / training
Support consumers
Limited capacity/possibility to support to massive number of consumers complaints No dedicated unit/department
Consent necessary to share data, not always requested Access to personal data allowed but difficult to do Consumers / Right to dispute and correct the data allowed borrowers rights but difficult to do No possibility to recur against PCR through a specific authority Lenders utilization of data for purposes not permitted by the law is unmonitored
5.3. INTERACTION WITH PAYMENTS SYSTEMS

Effective interrelations between payment systems and credit reporting operators are both instrumental to enhance the reliability of payment instruments and to improve the quantity and quality of the data managed by credit registries. The use of electronic payment instruments, which can capture relevant information on the repayment of commercial and financial obligations, can support credit information systems to further differentiate good from bad repayment behaviors. As a matter of fact, in Yemen, the Credit Registry could already be storing some information derived from payment systems, like information on rejected checks, and possibly some information from corporate credit cards, or checking overdraft accounts operated with ATM cards. This data may become relevant in the future and should be maintained since it can be used to determine clients payment behavior. In Yemen, the symbiosis between credit reporting and payment systems is not effective as yet, owing to some cultural, technical and logistical challenges. Among these are: i. ii. iii. the still limited acceptance of a borrowing culture among average consumers; the scarce penetration of advanced payment systems (not only advanced electronic/plastic money like credit cards and debit cards, but also the more unsophisticated checks); the still insufficient territorial coverage offered by the banking system which holds the financial
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inclusion of more potential consumers as well as the larger diffusion of credit; iv. the insufficient ATM network and the negligible P.O.S. system coverage, not yet adequate to support a massive diffusion of electronic payment systems (and on the way to fragmentation, should the banks decide to opt for separate networks); and v. the absence of pilot projects to massively introduce electronic payments systems to replace cash (also facilitating comprehension of new financial instruments); and cumbersome procedures to open new bank branches. Based on the experience of how other credit markets have developed (particularly in Latin America and South East Asia), it is possible to outline the evolutionary stages and changes that, in the medium-long term, the credit industry might undergo. ATM, debit and credit cards, and P.O.S. will start to gradually become part of the daily life of the Yemenite customer. These innovations, combined with the new risk management technology that some financial institutions are timidly starting to implement (and that will become ever more mature with the availability of complete credit information), will considerably change the way lenders grant credit today, as well as influence and alter consumer attitudes towards credit and new payment systems. i) A first phase of change will be characterized by the growing penetration and utilization of the online ATM/POS. Cardholders will progressively shift from the conventional cash/checks methods and increasingly pay their purchases electronically. Consumers will start to use multifunctional debit cards to withdraw money and purchase goods with cash, and when an adequate network is established, they will pay with the card at the P.O.S. ii) Gradually, the needs, the demands, and the likings of the clientele will be automatically reoriented towards more advanced payment methodologies. The magnitude of this evolution should be fully appreciated as well as its benefits for the system. World Banks research shows that the financial impact of the full shift from a cash oriented payment system to an electronic system may be estimated in a 0.5% to 1% GDP growth. iii) A further stage will be the gradual migration from payment cards to revolving credit cards. Credit cards, today a negligible presence in the financial services panorama (some lenders claim that the only obstacle to launch real revolving credit cards is the lack of complete information on consumers), will start to irreversibly and permanently represent the industry standard, forcing the less proactive banks to go after innovators and clients demand. iv) Retailers, non-regulated, non-financial, commercial lenders will start competing with the banks (as it has happened in most countries) offering credit directly, and avoiding the banks intermediation, particularly in the lower segments of consumers, thereby acquiring a significant share of the retail credit market. v) This will prompt the need for upgraded technological and informational infrastructure, as well as for state-of-the-art risk management techniques and skills that today are not commonly developed yet within the banking system. The introduction of credit scoring models and related technologies (monitoring, account management, collection strategies, etc.) will become indispensable for managing the risk of retail and SME portfolios.
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vi)
Instant credit as a result of the utilization of automation, credit bureau data and scoring will become a competitive advantage.
vii) An even stronger force that will ultimately push the transformation of consumer credit from traditional products (e.g. personal loans) towards plastic money will come from the Internet and from online banking. In fact, e-commerce will be the successive phase of credit evolution which traditional lenders will have to cope with, and which they will have to plan for, with serious advance. viii) One of the important repercussions of the new condition will be the fall of collateral dominance, especially for retail and other small ticket loans. The new credit products and portfolios will be managed with more advanced, automated procedures and tools, with lesser necessity of collateral and with the transformation of todays nearly completely secured credit portfolios into increasingly unsecured portfolios. ix) In the medium to long term, credit, as it is known today will cease, and customers will use their revolving credit lines to buy goods and services online (travel and flights, books, mobile phone services, movies, music, etc without any intermediaries. x) The future of credit will then go beyond traditional channels. A new payment system will emerge, i.e. mobile telephones. It is estimated that the volume of mobile phone payments globally increased from $ 3.2 billion (2007) to $37 billion (2008) . xi) Remittances and payments are already made through mobile phones, without any physical transfer of money. The social and business impact of this new technology and payment system can be dramatic. Cash, to start with, will be replaced by mobile phone payments. Small shopping, short commuting and entertainment will be particularly impacted, followed by the replacement of other small payments currently being made with plastic money. xii) While distribution and payment systems have traditionally been controlled by banks, mobile telecom operators will be in the virtual position to consider becoming financiers themselves (this is starting to happen in other markets). Needless to say the traditional lenders, i.e. the banking sector will be impacted the most as a result. xiii) This may be considered one of the biggest financial evolutions. The vast majority of the worlds 4 billion mobile phones are already operational, and mainly in the hands of the poorer
2,500
54
Figure 27: Mobile Telephones: A new payment system in the hands of the poor
4bn
25m
segments
of
the
world
population.
000s
2,000 1,500 1,000 500 0

Western Union Bank branches Post offices AT M s ET FPOS
Experiments are under way in many emerging markets (e.g. Kenya, South Africa, Philippines) to start using mobile phones for simple, non-intermediated credit and payments.
43
Source: WB 2005; VISA; UPU 2005
54
The Economist, February 17, 2007. American consumers carry with them mobile phones, twice as much as cash or credit cards. This proportion is four times higher among younger consumers aged 18-34, and decidedly higher in developing markets.
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Some quick-win actions may promote a broader coverage of the territory and increase the penetration of financial services in the less serviced regions of the country and in rural areas. While opening new branches and enlarging the network is a lengthy and capital intensive process, interesting alternatives are offered by: i. Banking correspondent agents network or branchless banking. This is a tested system that dramatically increased the availability of financial systems in Peru, Brazil and whose feasibility is currently being examined for introduction in other countries. In a nutshell, basic financial services, like payments, savings, and small loans can be offered through banks franchisees (e.g. pharmacies, post offices, supermarkets that are generally present even in small villages ). ii. Balancing the branch expansion strategy of the banking sector. In some countries, for example India- banking regulators ask financial institutions willing to open new branches in the more populated, commercial, profitable centers to also open a proportional number of branches in rural areas and less serviced/covered regions. iii. Mobile banking technology . Pilot projects - the introduction of simple credit products, based on plastic money and similar methodology of payments, and targeted to the less affluent and financially educated segments of consumers, should be considered, being one of the most effective and fastest ways to improve penetration of new credit/payment services and awareness among the consumers. As a first step, a program of utilization of debit cards linked to the public employees salary could be extremely effective. There are examples adopted by many countries (e.g. conta salario or salary account in Brazil, Angola, Pakistan, etc.) showing extraordinary results in terms of higher financial penetration rates and utilization of new services. The Brazilian conta salario is an account that can be fed only by the monthly salary, it is free of charges, and does not provide account holders with checks. Money can be withdrawn only with a debit card. In Syria, a significant portion of the active employed population is represented by public employees. This could represent the pilot segment on which to build an extraordinary, powerful, modernizing program first step. In Yemen, a significant portion of the active employed population is represented by public employees. This could serve as the pilot segment to build a powerful program. Introducing simple credit products can foster financial utilization and acceptance among lower segments of customers. In the past few years, some simple and inexpensive financial products have been introduced in other markets by regulators. These products are changing credit utilization behavior among borrowers and rapidly enlarging the inclusion of customers previously considered non-bankable. An example is the Credito Consignado or Consigned Credit introduced and intensively supported by the Brazilian government a few
56 55
55
A more detailed explanation of how the branchless banking agent system performs can be retrieved on the World Bank-CGAPs internet site http://technology.cgap.org/2007/10/25/how-do-you-spell-success-with-banking-agents-p-e-r-u/ Full details of mobile banking technology and benefits can be found on World Bank- CGAP site www.cgap.org.
56
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years ago. In this case, small personal loans are granted to salaried people who open a no-fee account (for instance a Salary Account) with a bank. The monthly installment is deducted directly from the salary and paid by the employer to the bank. The risk for the bank is minimal; consequently, the applied rate of interest must be significantly lower than the average, making the loan more affordable and acceptable to a larger portion of the population. Consigned credit is an effective tool to broaden credit base, while reducing risk in a developing market. It is frequently used in many countries in MENA. It becomes obsolete when credit culture/financial education increases, and information sharing plays a major role in identifying borrowers risk. Rationalized ATM networks are important, when banks establish proprietary ATM
There are also opportunities for improvement in the efficiency of the ATM network and the terminal base. In the case of terminals, many merchants are forced to maintain two systems in order to get around technological incompatibilities, and there are also multiple ATM networks. The large banks have traditionally seen private ATM networks as a competitive tool, whereas smaller banks have been more likely to share their networks. In 2003 there were 29 ATM networks operating in the country with more than 137,000 ATMs, only 38% of which were linked to an open network. A shared network would substantially reduce costs. For example, at Guarulhos Airport Sao Paulo, there are ten ATMs from six banks, about double the requirement if a shared network were available.
BOX 9: IMPORTANCE OF ATM/POS NETWORKS
networks not connected among them. This represents a high cost for the industry which is normally passed on to the final customers, and inhibits a larger, cheaper, and friendlier usage of plastic money. An enlightened example is represented by the Brazilian payment system, possibly one of the most expensive credit industries worldwide in terms of interest, fees (Box 9) .
57
57
Economist Intelligence Unit, Assessing Payments Systems in Latin America, May 2005
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ANNEXES
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ANNEX I WORLD BANK CREDIT REPORTING PRINCIPLES

CREDIT INFORMATION SYSTEMS A modern credit-based economy requires access to complete, accurate and reliable information concerning borrowers payment histories. Key features of a credit information system should address the following: a. Legal framework. The legal environment should not impede and, ideally should provide the framework for, the creation and operation of effective credit information systems. Libel and similar laws have the potential of chilling good faith reporting by credit information systems. While the accuracy of information reported is an important value, credit information systems should be afforded legal protection sufficient to encourage their activities without eliminating incentives to maintain high levels of accuracy. b. Operations. Permissible uses of information from credit information systems should be clearly circumscribed, especially regarding information about individuals. Measures should be employed to safeguard information contained in the credit information system. Incentives should exist to maintain the integrity of the database. the population. c. Public policy. Legal controls on the type of information collected and distributed by credit Legal controls on the type of The legal system should create incentives for credit information services to collect and maintain a broad range of information on a significant part of
information systems can be used to advance public policies.
information collected and distributed by credit information systems may be used to combat certain types of societal discrimination, such as discrimination based on race, gender, national origin, marital status, political affiliation, or union membership. There may be public policy reasons to restrict the ability of credit information services to report negative information beyond a certain period of time, e.g., five or seven years. d. Privacy. Subjects of information in credit information systems should be made aware of the existence of such systems and, in particular, should be notified when information from such systems is used to made adverse decisions about them. Subjects of information in credit information systems should be able to access information maintained in the credit information service about them. Subjects of information in credit information systems should be able to dispute inaccurate or incomplete information and mechanisms should exist to have such disputes investigated and have errors corrected. e. Enforcement/Supervision. One benefit of the establishment of a credit information system is to permit regulators to assess an institutions risk exposure, thus giving the institution the tools and incentives to do it itself. Enforcement systems should provide efficient, inexpensive, transparent and predictable methods for resolving disputes concerning the operation of credit information systems. Both non-judicial and judicial enforcement methods should be considered. Sanctions
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for violations of laws regulating credit information systems should be sufficiently stringent to encourage compliance but not so stringent as to discourage operations of such systems. A modern credit-based economy requires access to complete, accurate and reliable information concerning borrowers payment history. Key features of a credit information system should address the following. An effective credit information system can be integral to the operation of modern financial systems. Credit information systems can include a number of functions, including collecting, analyzing, and distributing information about how consumers and businesses, large and small, handle their credit obligations. This type of information has proven to be an effective tool for a variety of purposes, including assessing the risk faced by creditors, as past payment experience is a strong predictor of future performance. Credit information systems also make it possible to empirically assess, in the form of credit scoring tools, which factors are most predictive, permitting finely tuned credit decisions. As a result, creditors can more intelligently assess consumer and business lending decisions, thus promoting the extension of credit and economic development in the countries in which they operate. Also, creditors are in a better position to develop numerous credit offerings tailored to the risk presented by borrowers unique credit histories. Credit information systems promote competition among lenders, thus reducing the cost of credit. In fact, such systems can also increase the ability to attract foreign investment capital by providing foreign creditors a rational basis on which to evaluate credit risk. This regionalization and globalization of credit granting is further enhanced if consistent or at least transparent information collection standards are employed. LEGAL FRAMEWORK 1. Basis for Operation of Credit Information Systems. The legal environment should not impede and, ideally should provide the framework for, the creation and operation of effective credit information systems. Establishment and operation of credit information systems may be impeded or prevented by legal prohibitions or uncertainties concerning the application of laws relating to the collection, disclosure and use of financial information. For instance, bank secrecy laws may be perceived to prohibit banks from sharing information about their customers accounts and payment history with a credit information system. creation or operation of credit information systems. 2. Enabling legislation is not required for the development of credit information systems. Many credit information systems have developed organically so long as laws did not prevent their operation. Nonetheless, concerns about fair use of information have led to passage of legislation authorizing and regulating the existence of credit information systems. Passage of such legislation removes doubt about the legal viability of such entities and by creating greater regulatory certainty may encourage entrants into the credit information systems marketplace. 3. Liability Protections. Libel and similar laws have the potential of chilling good faith reporting by credit information systems. While the accuracy of information reported is an important value, The existence of such laws can chill the
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credit information systems should be afforded legal protection sufficient to encourage their activities without eliminating incentives to maintain high levels of accuracy. There are a number of potential legal impediments to the development of credit information systems. One of the most significant is the existence of libel laws, laws that permit legal actions based on false publications that damage a person's reputation. The information maintained in a credit information system is of the type likely to damage a persons or companys reputation if publicly known. This may include failure to pay bills or filing bankruptcy. While credit information systems should be encouraged to maintain high standards of accuracy, potential exposure to libel actions -- even as a result of inadvertent mistakes -- could discourage their operation or make them unwilling to report information unless there was no question about its accuracy. Even with the best intentions, it can be difficult to develop certainty concerning the accuracy of information being reported. Accordingly, some protection from libel or similar actions can be critical to the existence of comprehensive credit information systems. Such protections should not relieve credit information systems from the responsibility to provide reasonably accurate information. Instead, standards more geared to the challenges of operating a credit information system should be substituted. OPERATIONS 1. Use Restrictions. Permissible uses of information from credit information systems should be clearly circumscribed, especially regarding information about individuals. Credit information systems collect a wealth of information about individuals and businesses. Much of that information could have a serious impact on reputations and financial standing. The information could be used in negative and potentially harmful ways, such as for purposes of blackmail or referrals to criminal authorities for tax evasion. On the other hand, if the information is used for legitimate, beneficial purposes, the existence of the credit information system is likely to receive public acceptance. Legally imposed use restrictions can address these concerns. 2. Data Security. Measures should be employed to safeguard information contained in the credit information system. To the extent information in credit information systems is sensitive, and to avoid undermining use restrictions, such systems should employ reasonable methods to protect the security of such information. As appropriate, these methods may include physical, electronic and procedural safeguards to protect against improper data access. 3. Credit information services can provide valuable information for assessing repayment risk, likely profitability of accounts, debt collection, marketing, employment screening, tenant screening, claims analysis, insurance underwriting, market research, and economic trends. A sound environment for managing credit and insolvency risk requires reasonable access to accurate, reliable and current credit information on borrowers that affords adequate protection and safeguards for the privacy of borrowers and that is governed by general rules of due process.
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4. The legal environment should provide a transparent procedure that contains incentives for gathering and dispensing information. Access should be provided to firms engaged in credit activities and not limited to particular types of entities, e.g., banks. While there may be arguments to limit access to firms that furnish information to the credit information service, this could unduly limit potentially beneficial users, especially firms that are just starting up and may not yet have significant amounts of information to contribute. 5. Transparency and good corporate governance are the cornerstones of a strong lending system and corporate sector. Transparency exists when information is assembled and made readily available to other parties and, when combined with the good behavior of corporate citizens, creates an informed and communicative environment conducive to greater cooperation among all parties. Transparency and corporate governance are especially important in emerging markets, which are more sensitive to volatility from external factors. Without transparency, there is a greater likelihood that loan pricing will not reflect underlying risks, leading to higher interest rates and other charges. 6. Data Integrity. Incentives should exist to maintain the integrity of the database. Credit
information systems can be used in a variety of ways. Some uses, such as evaluating credit risk, rely on a database containing historical data on as large a number of potential borrowers as possible. Other uses may not require that data be maintained for extended periods of time. One such use can be as a means of collecting past due obligations by encouraging repayment to have ones name removed from the list. In that context, it might make sense to remove a debtors name from the database when the obligation has been satisfied. However, if the database is also to be used to make future risk assessments, removal of that information might encourage payment of the particular debt at issue, but it would undermine the ability to identify borrowers who have fallen behind in their payments in the past. If a database is to be used, even in part for credit risk assessment, there should be incentives in place to keep data in the system even after that particular creditors loans have been repaid. 7. Scope of Data. The legal system should create incentives for credit information services to collect and maintain a broad range of information on a significant part of the population. Credit information systems are most effective and enhance risk prediction if they contain data on a large segment of the population. The more ubiquitous their coverage, the better they can serve Many existing credit systems work financial institutions in evaluating applicants for credit.
effectively through voluntary contribution of data by creditors who recognize it is in their selfinterest to contribute information on their customers. If voluntary contributions are ineffective in creating a robust credit information system, legal requirements to report information could be imposed on creditors. Such requirements could avoid the problem that large incumbent creditors may choose not to contribute information due to the concern that reporting will facilitate creditors competing for their existing customers.
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8. There is strong empirical evidence that systems that collect both positive and negative payment histories permit more accurate risk assessments. Those same systems present the potential of financial institutions identifying their best customers to competitors, thus discouraging participation in the system. Alternatives exist to reduce the risk of losing customers, such as not allowing credit information systems to be used to target specific financial institutions customers. However, it should be noted that these alternatives do potentially reduce some of the beneficial competition that results from increased access to credit information. 9. One means of increasing demand for credit information services would be if creditors, both consumer and commercial, were expected as part of due diligence on extending credit to consider the borrowers credit history. This would serve the dual purpose of improving those firms risk controls and creating a necessary market for credit information systems. PUBLIC POLICY 1. Collection and Use Restrictions. Legal controls on the type of information collected and
distributed by credit information systems can be used to advance public policies. Control of the use of information collected by credit information systems, or even controls over the type of information such systems are permitted to collect, can be used to advance public policy goals. These public policy goals may often be in tension with the risk assessment functions of credit information systems. In theory, those systems collect the maximum information they can efficiently collect and use it to predict risk. If they were not permitted to use certain types of information, due to public policy concerns, the ability to predict risk based on the available data could be diminished. There are often public policy judgments made to sacrifice the predictive value of the data in favor of advancing other social or economic goals. 2. Anti-discrimination. Legal controls on the type of information collected and distributed by credit information systems may be used to combat certain types of societal discrimination, such as discrimination based on race, gender, national origin, marital status, political affiliation, or union membership. There are often legitimate societal values that call for assessment of credit risk, either individual or business, based solely on prior credit experience, as a method of equalizing treatment of borrowers. In some cases, this could result in a prohibition on collecting certain types of information, such as demographic or other data about borrowers that goes beyond their prior loan payment experience, including gender, marital status, or race. The absence of such data collection and use restrictions might well enhance the ability to predict risk, such as by concluding that men pose a greater credit risk than women, or foreigners are more credit worthy than citizens of a country. However, there may be strongly held societal values calling for equal treatment regardless of certain characteristics. These values may be deemed worth the economic costs of reducing the ability to predict risk based on credit information system data. This may result in prohibitions on collecting or using certain information about borrowers, e.g., race, gender, etc.
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3. Ironically, there is another approach to combating discrimination that is directly at odds with reducing the collection of information. Rather than excluding information concerning protected characteristics, in some cases, lenders may be required to collect such data. The data is collected not for its predictive value but instead to use as a basis for evaluating whether the financial institution is making decisions based on prohibited characteristics. 4. Obsolescence. There may be public policy reasons to restrict the ability of credit information services to report negative information beyond a certain period of time, e.g., five or seven years. Certain types of information in a credit file have the potential of seriously impeding a business or individuals ability to get credit. One such example is the filing of a bankruptcy petition; another is a series of loan defaults. The knowledge that an individual or company was forced to resort to bankruptcy because their obligations exceeded their assets could lead future creditors to decline to extend them credit. While this is quite rational, the consequence can be the lifetime of economic destruction for an individual or company. In such cases, the government might find itself burdened with providing assistance. 5. Yet, in many cases, late payments or even bankruptcy filings are precipitated by causes beyond an individuals control, such as a natural disaster, unexpected medical costs, or loss of employment or a contract. It may not signify a permanent inability to manage financial affairs. As a result, there can be a desire to allow borrowers who have at one time failed to fulfill their financial obligation to rebuild their credit histories through subsequent good behavior. A credit information service could undermine this goal by continuing to report the existence of the negative information indefinitely. As a result, there may be important policy reasons to prevent the reporting of certain types of negative information, e.g., late payments, court judgments, tax liens and bankruptcies, beyond a reasonable period of time, such as five to seven years. By contrast, there might be other types of negative information, e.g., convictions of serious crimes that are in societys interest to report for longer periods of time or even indefinitely. It is possible to craft regulation of reporting practices by credit information services to address and balance these policy concerns. PRIVACY 1. Notice. Subjects of information in credit information systems should be made aware of the
existence of such systems and, in particular, should be notified when information from such systems is used to made adverse decisions about them. Citizens in a country are often troubled by the existence of secret, hidden databases that contain information about them, regardless of whether those databases are maintained by the government or private firms. The legitimacy of credit information systems will be enhanced, and public apprehension reduced, if there is transparency concerning their existence and operations. 2. Aside from a general awareness of the existence of such systems, it can be critical to inform data subjects that information from those systems was used to make adverse decisions about the
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subject.
It is impossible for databases containing thousands, if not millions, of files from
numerous sources, public and private, to maintain current accurate information about a population that may have similar or identical identifiers, who do not use their personal identifiers in a consistent manner in all their interactions, who change identifiers over time (e.g., by getting married), and who move frequently. If erroneous data from those systems is used to made adverse decisions about individuals or companies, and the subject is not notified of the source of the data that led to the adverse decision, the subject will have no opportunity to correct the misinformation. As a result, the subject will continue to face rejections based on incorrect credit information system data. Not only is that unfair to the subject, it cast doubts on the operation of the system. It also means that users of the system will continue to be provided inaccurate data that will lead to incorrect risk assessments. 3. Notifying subjects that adverse action was taken based on credit information service data can also be a tool in policing anti-discrimination laws. If data subjects are permitted access to their information (see below), they can assess whether there are legitimate, non-discriminatory grounds for the denial. For example, if they have comparable credit standing to other borrowers who were granted credit, and the only difference between the applicants is gender or race, they might be able to establish that discrimination has occurred. 4. It would also be possible to structure a credit information system to only collect or use information with the consent of the data subject. However, giving data subjects control over their inclusion in the database, as opposed to process rights over the use of their data, risks allowing individuals or businesses with poor credit to exclude themselves or limit access to their complete credit history. These are the very people or entities creditors most need risk information about. 5. Access. Subjects of information in credit information systems should be able to access
information maintained in the credit information service about them. Access to data by subjects can serve a number of important purposes. First, greater transparency about how the database operates and the type of information maintained can enhance public confidence. Second, only with access can data subjects who have had adverse action taken against them based on data in the service, determine whether that data is erroneous. Third, in the case of distressed enterprises, it can be helpful to have clear laws and procedures that require disclosure of, or access to, timely and accurate financial information on the distressed enterprise. This can encourage lending to, investment in or recapitalization of viable distressed enterprises. It also helps support a broad range of restructuring activities, such as debt write-offs, rescheduling, restructurings and debt-equity conversions; and provide favorable or neutral tax treatment for restructurings. 6. In addition, the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems call for laws that require the provision of relevant information on the debtor that could be accomplished by a credit information service. In addition, those Principles state that corporate
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workouts and restructurings should be supported by an enabling environment that encourages participants to engage in consensual arrangements designed to restore an enterprise to financial viability. An enabling environment includes laws and procedures that require disclosure of, or ensure access to, timely, reliable and accurate financial information on the distressed enterprise; encourage lending to, investment in or recapitalization of viable financially distressed enterprises; support a broad range of restructuring activities, such as debt write-offs, rescheduling, restructurings and debt- equity conversions; and provide favorable or neutral tax treatment for restructurings. A viable credit information service can advance these goals. 7. Dispute Rights. Subjects of information in credit information systems should be able to dispute inaccurate or incomplete information and mechanisms should exist to have such disputes investigated and have errors corrected. It is of limited value to simply make data subjects aware that erroneous information from a credit information service served as the basis for an adverse action concerning them. In order to make that information useful, there must be mechanisms in place, either voluntary or mandated, to have such disputes investigated and, if information turns out to be erroneous, have the information corrected. 8. There are often timeliness concerns about resolving information disputes, perhaps because a business needs a financial commitment in order to sign a lease or a consumer wishes to purchase a new home that will go to another potential buyer if funding cannot be arranged. Thus, some requirement of timely consideration of disputes may often be critical to making the dispute right meaningful. 9. Similarly, a cursory review of a dispute, with no real effort to investigate and learn the correct information, can serve to make dispute rights meaningless. In some cases, the error may be apparent on its face, such as a date of birth of an infant belonging to a senior citizen. In others, there may be a need to contact the furnisher of the information to verify its accuracy. Oftentimes the extent of the investigation will be determined by the nature of the dispute. ENFORCEMENT/SUPERVISION 1. Supervisory Function. One benefit of the establishment of a credit information system is to permit regulators to assess an institutions risk exposure, thus giving the institution the tools and incentives to do it itself. While the principle focus of credit information systems is to permit financial institutions to gauge the risk posed by borrowers, those systems provide valuable tools for regulatory agencies to supervise institutions under their jurisdiction. Credit information systems permit efficient systematic analysis of a financial institutions loan portfolio, including its size, diversity, and risk levels over time. 2. Effective Enforcement Systems. Enforcement systems should provide efficient, inexpensive, transparent and predictable methods for resolving disputes concerning the operation of credit information systems. Both non-judicial and judicial enforcement methods should be considered. In
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light of the important financial and privacy interests involved in reporting credit information, there is a need for a mechanism to resolve disputes relating to accuracy and proper disclosure. This mechanism can exist in the courts, through administrative processes, government oversight, or self-regulatory organizations. 3. Proportional Penalties. Sanctions for violations of laws regulating credit information systems should be sufficiently stringent to encourage compliance but not so stringent as to discourage operations of such systems. While compliance incentives serve a valuable role in maintaining the integrity of a credit information system, there is a risk of over-deterring conduct by making the penalties for violations too costly. At the extreme, this could deter operations of such services.
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ANNEX II GLOSSARY
i. Code of Conduct: The regulatory framework allowing governing the relationships between Private Credit Bureaus, the data providers, the users, the borrowers, the other bureaus, and the supervisory authority. It specifies, among other things, policies and procedures of resolving conflicts and borrower complaints. ii. Consent: A written clause signed by the borrower or legal designee explicitly giving consent to: Sending his data to a credit reporting company Inquiring about his information and data Consent may or may not be necessary for institutions (depending on local legal/social norms or requirements). iii. Credit bureau: Such info providers that build up credit files by compiling, retaining, processing and analyzing personal and credit data relating to the credit positions of borrower of banks and non bank financial institutions, Telecoms, retailers of goods and services which provide credit. CB provides users with credit reports and other credit reporting and scoring services while not giving any recommendations on credit provision. iv. Credit data: This includes among others: Gross amount of loan or credit facility Outstanding balance Type of facility Currency of facility Due date of facility Due payments Pledged collaterals Any other data that serves the purposes of the credit reporting company. v. Credit file: Credit reporting companies compile, retain, and process information about borrowers in credit files. vi. Credit file inquiry data: This includes: Name of User, Activity of User and Date of Inquiry.
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vii.
Credit registry: A database of personal and credit information maintained by the Central Bank.
viii.
Credit report: A paper or electronic report produced by the credit reporting company containing some or all of the data in the credit file of a borrower or a summary thereof.
ix.
Credit Scoring: Modeling technique that uses the information contained in the credit file of a credit applicant to arrive at a relative score according to statistical principles applied uniformly to all borrowers. The relative score is meant to predictive the likelihood (odds) that the applicant will become a good or poor risk customer in the future.
x.
Customers/borrowers (data subjects): Individuals or institutions that apply for credit. Their pertinent information and data are compiled in credit files at the credit reporting company and can be shared in accordance with either the relevant legislations or the rules in the Code of Conduct.
xi.
Database: An electronic archive containing the credit files of borrowers as compiled from data providers and retained and processed by the credit reporting company.
xii.
Data providers/contributors: All institutions that provide any form of credit as well as all institutions that have identification data, credit data or otherwise any information or data that relate to the payment habits of borrowers. All such institutions are able to provide the credit bureau with information and data in accordance with the legislation or rules set out in a Code of Conduct.
xiii.
Data sources: One or all of the sources which are legally or consensually allowed to provide data to credit reporting company. These could be: Banks The Credit Registry System at the Central Bank National ID registry Mortgage companies Leasing companies / factoring companies Insurance companies Institutions providing credit to micro, small and medium enterprises Money market companies Retailers of goods and services that sell in installments Credit reporting companies
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Public records: Civil Registry, Voters Roll, Property Registry, Court records, etc. Any other institutions in possession of information or data that can serve the purposes of the credit bureau. xiv. Data provider information: Including name, main activity, and address of provider. xv. Disaster recovery site: A location that is physically separate from the site of the credit bureau and sufficiently away to be immune of potential physical threats to the site of bureau. The disaster recovery site would house a continuously updated copy of all databases of the bureau. xvi. ID (National): A unique, definitive national identifier for all national citizens, which never changes. xvii. Identification data: For individuals these include: Name Nationality Date of birth Place of birth Identity credentials Current home address Home address/s of past 3 years Occupation Current work address Work address/s of past 3 years Name of spouse Any other data that serves the purposes of the credit reporting company For institutions these include: Name Legal form Shareholders with more than 10% of paid-in capital Commercial registration number / commercial registration date Address Main activity Secondary activities Data on the financial position of the institution And any other data that serves the purposes of the credit reporting company.
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xviii.
Negative information: Information on the failure of borrowers to fulfill their financial obligations on time. This includes Delays Irregular payments Bounced checks Default Reschedules Court orders, foreclosures, protests and bankruptcies/liquidations.
xix.
Payment performance data: This is historical information that generally goes back 5 years and reflects the commitment level of borrower to pay on time.
xx.
Positive information: Information on the timely payment of borrowers.
xxi.
Public records data: Data available in public records such as those in the civil registry, commercial registry, property registry, national ID and court records.
xxii.
Permissible purpose: The user should have a limited, clear, permissible, purpose to make an enquiry and get a credit report. Permissible purposes could be: An authorization through a court order Considering the provision of credit at the request of a borrower whether it is for the first time, a credit increase, credit renewal, or a change in credit terms Considering the acceptance of any form of guarantee to a credit application Getting a credit score for the credit applicant Having a written consent from the borrower or legal designee.
xxiii.
Reciprocity: Basic principle of information sharing determining that users may use and see only the same type of information they share with the other parties.
xxiv.
Reporting threshold: Minimum credit facility above which banks/lenders are obligated to report credit data of borrowers to the credit bureau.
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xxv.
Users: Institutions having a contractual relationship with credit reporting company to request credit files and other services for permissible purposes. Also borrowers about whom the credit bureau retains credit files. Credit bureaus are prohibited from providing individual users with information about others. Individual users, however, can enquire about their own information and data in accordance with the rules set out in any legislated self enquiry process or Code of Conduct.
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ANNEX III RECAP OF CBYS REGULATIONS ON CREDIT REPORTING
CIRCULAR NUMBER
28877
CIRCULAR DATE
26/4/2000
SUBJECT
Instructs banks to provide the PCR with data on borrowers who did not fulfill their credit payments (credits over than 5 Million YR and over 90 days delinquency) and inquire the PCR. With regards to the PCR banks are mandated to: - do not grant credit to any customer before consulting the credit registry - do not grant credit to any customer before getting an identifier from the credit registry - do not grant credit to any customer before ensuring that he is not on the notification list (previous circular) - include the following information in the request, to allow the creation of a search key: Id, Address, City, date of Birth Setting up the specifications of the credit registry and in particular the reduction of the threshold to YER 500,000 (from YER 10,000,000). The deadline to provide the PCR with the data is set th to the 5 day after the end of each month. Banks are asked to always request customers consent (provided with the circular) as a mandatory piece of the credit file. Reminder to the banks regarding their obligations stated in the circular 28877 (26/4/2000) related to inserting and retrieving customers into/from the credit registry, before granting credit. Reminder to the banks regarding their obligations stated in the circulars 54064 (2/7/2006) and 55858 (8/7/2006). Models to inquiry for corporate and individuals are attached to the circular. The banks are requested to use the National ID. The banks are authorized to show customers their credit reports received from the credit registry. Customers have the right to get all their credit information from the banks they are dealing with. Information about the initiative of the CBY to install a new credit registry (from UAE) supporting on-line exchange of data. (Required: Internet Line).
54064
2/7/2006
55858
8/7/2006
58912
22/7/2006
26222
9/4/2007
42589
21/6/2008
28282
28/3/2009
28270
28/3/2009
Page 75
July 2010
CIRCULAR NUMBER
CIRCULAR DATE
SUBJECT
The banks are mandated to: - enter the data regarding their newly approved customers according to the new structure/layout of the new system before 30/6/2009 - during the month of July 2009 banks must add all of their records/customers information and update the credit lines recording the position of 30/6/2009 - Inquiry will continue until 31/7/2009 in the OLD system - Starting 1/8/2009, the banks can perform their inquiries in the new system. The position recorded will be as the one on 30/6/2009. - Banks must update their customers positions on a daily basis. The circular lists the information required in the NEW system/format, like name (English, Arabic), National Id, type of credits, etc. Reminder to the banks regarding the use of the consent clause (circular 58912 of 22/7/2006). - This consent is a part of the credit contract - The customer needs to sign the consent as part of the contract documents. Banks are reminded to: - complete data provisions according to the deadline set for this operation in the circular 25429 of 21/4/2009 - start providing data on credits with amount lower than the existing threshold (YER500,000).
25429
21/4/2009
25000
21/4/2009
25579
28/4/2009
34746
25/5/2009
Page 76

ACRI-MENA ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010

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ACRI-MENA ASSESSMENT OF THE STATUS OF THE NATIONAL CREDIT REPORTING SYSTEM IN YEMEN July 2010

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ARAB CREDIT REPORTING INITIATIVE: GREEN BOOK

GREEN BOOK - an assessment of the credit reporting system in Yemen

ACRONYMS AND ABBREVI ATIONS

GREEN BOOK - an assessment of the credit reporting system in Yemen

Mohammed Taha Rafi

GREEN BOOK - an assessment of the credit reporting system in Yemen

2.3 CREDIT RISK MANAGEMENT & CREDIT ACCESS CONSTRAINTS ................ 20

GREEN BOOK - an assessment of the credit reporting system in Yemen

GREEN BOOK - an assessment of the credit reporting system in Yemen

1. MACROECONOMICS AND DEMOGRAPHICS

Figure 1: Map of Yemen

Figure 2: GDP per capita based on purchasing-

GREEN BOOK - an assessment of the credit reporting system in Yemen

1.2. DEMOGRAPHICS AND POPULATION TRENDS

GREEN BOOK - an assessment of the credit reporting system in Yemen

GREEN BOOK - an assessment of the credit reporting system in Yemen

2. STATUS OF CREDIT AND FINANCIAL MARKETS

BOX1: YEMEN CREDIT & FINANCIAL MARKETS SNAPSHOT

Figure 6: Credit Distribution by sector(2007)

Figure 7: Credit distribution by sector (2007)

Agriculture and Fishing

Industry Construction Trade Others Classified Loans

GREEN BOOK - an assessment of the credit reporting system in Yemen

Figure 9: Bank Deposits (YER millions)

GREEN BOOK - an assessment of the credit reporting system in Yemen

Figure 10: Deposit by type (YER millions Aug. 2009)

Table 3: Number of Financial Establishments and Corporations: 2002 to 2006

2002-6002 Number of Financial Establishments and Corporations: 2002 to 2006

Unsecured is not among

2006* 17 1 10 4 2 463 17 446 16 12 4 496

2005 17 1 10 4 2 410 14 396 16 12 4 443

2004 18 1 11 4 2 349 14 335 16 12 4 383

2003 18 1 11 4 2 341 10 331 15 11 4 374

2002 18 1 11 4 2 299 7 292 15 11 4 332

3-1 Insurance Corporations 3-2 Pension and annuity funds Total

* : (1) (2) (3)

GREEN BOOK - an assessment of the credit reporting system in Yemen

landscape limited the

remains constitutes and

GREEN BOOK - an assessment of the credit reporting system in Yemen

2.2 MARKET PLAYERS

GREEN BOOK - an assessment of the credit reporting system in Yemen

Figure 12: Outstanding bank loans and advances (YER million)

Figure 13: Banks Branch Network as of end of 2007

branched. The banking sectors branch network is comprised of 228 branches

with the highest

GREEN BOOK - an assessment of the credit reporting system in Yemen

250 200 150

2.2.2 MICROFINANCE INSTITUTIONS

(USD 62.54 billion).

2365 3116 3500 3561

Al-Amal Abyan SFSD

SOFD Aden SMEF

National Al-Awael Al-Hudaidah

MFDP Sana'a Wadi

GREEN BOOK - an assessment of the credit reporting system in Yemen

Figure 19: Al-Amal Bank 5 Year Plan (loan volumes)

GREEN BOOK - an assessment of the credit reporting system in Yemen

GREEN BOOK - an assessment of the credit reporting system in Yemen

2.2.3 MOBILE TELEPHONE COMPANIES

to 30% . According to industry growth estimates, it is expected that the

2.2.4 OTHER LENDING INSTITUTIONS

GREEN BOOK - an assessment of the credit reporting system in Yemen