Cablegate: Services in Yemen: Legally Open for Investment

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A
SUBJECT: Services in Yemen: Legally Open For Investment


1. Summary and comment: Insurance, telecommunications and the
banking industry are all possible fields for American investment
in Yemen. The insurance industry is steadily growing and open to
investment. With only 1.3 million fixed lines, potential exists
for the telecommunications services to expand. The banking
industry is likely the least hospitable to foreign investors
because Yemen's commercial courts are not able to ensure a sound
investment climate. Yemen's three main service industries are
still plagued by government inefficiency and lack of qualified
employees to carry out government's regulatory role. End summary
and comment.

--------------------------------------------- -----------
Insurance Industry: Open, but Few Are Willing to Risk It
--------------------------------------------- -----------

2. Insurance enterprises are subject to the Supervision and
Control of Insurance Companies Law 37 of 1992. In 1997, Law 9
and Law 22 for Commercial Companies amended the law in accordance
with the 1995 economic reform package. Twelve insurance
companies operate in Yemen and a thirteenth is applying for a
license to issue health insurance. Insurance companies must have
100 million Riyals (550,000 USD) to begin operation. Current
amendments under consideration would raise the minimum to 400
million Riyals (2.2 million USD). The most common type of
insurance in Yemen is life and fire. According to the Ministry
of Industry and Trade (MIT) officials who regulate the insurance,
the industry is steadily growing in Yemen.

3. A ministerial decision by MIT can suspend a company's
activities for less than a year if the company fails to show
their records and documents for review. The company can appeal
to the court in order to plea against the suspension decision,
although Post is unaware of any suspension orders issued by MIT.
MIT also reviews annual reports of all insurance companies,
although with only three inspectors their capacity is limited.
For an insurance company to open, the company must deposit ten
percent of the capital with MIT, an exception may be granted if
the company seeks to invest its capital outside of the ministry.
Foreign companies are allowed to own up to 25 percent of a local
insurance company, although presently foreign investors only own
about ten percent of any insurance company operating in Yemen

4. A draft law at the ministry would allow foreign companies to
own up to 49 percent of an insurance company. According to
existing laws, foreign companies are free to operate in the
reinsurance sector, where companies act as a guarantee for
smaller insurance companies. No foreign companies are presently
in the reinsurance business. According to Law 37, a majority of
the companies' board of directors should be Yemeni nationals.
Yemeni citizens cannot directly or indirectly insure any of their
locally based property in any company outside the country,
although the Minister of Industry and Trade may grant an

Telecommunications: Potential For Growth

5. With 1.3 million fixed phone lines and 500,000 internet users
the telecommunications industry in Yemen is steadily expanding.
Teleyemen, the state monopoly operated by France Telecome, still
controls domestic fixed and international lines and is investing
in CDMA technology to expand rural use. Two mobile operators
exist in Yemen, and Yemen plans to issue a tender for a third
license for a company this year, reftel. Two state-run internet
companies operate, and the ROYG is working to expand internet
usage. Foreign investment is allowed and occurs only in
partnership with the government as in the case of the French
operating alongside Teleyemen to operate. To date, there are no
plans to break-up the state monopoly.

Banks in Yemen: Serving the Rich

6. Eighteen banks currently operate in Yemen including the
Central Bank of Yemen (CBY), which oversees banking regulation
and currency exchange. Of the eighteen banks, two are fully
state-owned and two are partially state-owned. Nine are private
domestic banks (including four Islamic banks), and four are
private foreign banks. The largest bank operating in Yemen is
the state-owned National Bank of Yemen, which is considered a
prime candidate for privatization. The three other state-owned
banks are also being considered for unification under a World
Bank reform program, with the Yemen Bank for Reconstruction and
Development likely to be next on the list. While there is much
talk about banking privatization, no progress has been made in
the past few years.

7. The average Yemeni does not have a bank account and relies on
the Hawala (informal) system to transfer money to friends and
relatives. Central Bank officials estimate that only three
percent of Yemenis have bank accounts and due to current economic
constraints, rapid growth is unlikely. Typically, Yemen's banks
do not handle large transfers or have a wide customer base. Due
to the limited nature of domestic banks capabilities, small
businessmen and women have difficulty obtaining loans if they do
not know the owners of banks personally. Banks are reluctant to
loan money to those they do not know because they cannot resort
to commercial courts to retrieve bad loans. The locally owned
banks cannot compete against the larger international or state-
owned banks because they do not have the high-rate of
capitalization to undergo such projects. In the mid-90s, Yemen's
commercial banks suffered from a large number of under performing
loans, but an effort to reform the banking system has reduced the
number of bad loans.

8. American banking in Yemen ended with the closure of Citibank
in 1984. Today, the only large international banks operating in
Yemen are Arab Bank and Credit Agrigcole S.A. (The two other
foreign banks Rafadeen Bank (Iraq) and Gulf Bank). Commercial
Banks are allowed to purchase foreign exchange domestically from
customers and tourists and to hold a percentage of foreign
exchange purchased to effect import payments on behalf of the
Central Bank. There are no taxes or subsidies on purchases or
sales of foreign exchange. Under Yemen's Investment Law,
investors are permitted to hold foreign-currency accounts in
Yemeni banks. Commercial banks are authorized to open letters of
credit for the importation of most goods, provided that such
imports are self financing; these banks may accept licenses
issued by MIT without approval from the central bank.

9. Banks are subject to the Central Bank of Yemen organizing law,
the Commercial Banks law and the Commercial Companies Law. One
group or investor may borrow fifteen percent of a bank's capital
and twenty five percent of the banks assets may be liquid at any
one time. Out of concern for the lack of capitalization, the
Central Bank Governor is proposing increasing the rate of
capitalization to Six Billion Riyals -- approximately 30 million
USD from 2 Billion Riyals or 10 million USD. The Central Bank of
Yemen does not insure individual's deposits in the banks they

10. Commercial bankers complain that the Central Bank is more
interested in maintaining a stable Riyal and does not promote
open banking. One example is that the highest currency is the
1, 000 Riyal note (5.50 USD), harming cash flows and limiting the
ATM machine capacity. Yemen's Banking regulations also allow
board of directors to take advantage of the bank's facilitations;
use deposits and shares as long as they are decision makers.
Confidence in the banking system is limited, and it is common for
profits to be used to replenish deficits incurred by bad debts.

11. Commercial bankers complain that the Central Bank is more
interested in maintaining a stable Riyal than working to expand
Yemen's banking capabilities. The largest bill the Central Bank
authorizes is the 1,000 Riyal note (5.50 USD), which harms cash
flow and ATM capacity. Confidence in the banking system is
limited, and it is common for profits to be used to replenish
deficits incurred by bad debts. One possible area for USG
assistance would be to strengthen the Central Bank's regulatory
capacity and work to encourage policies that promote the
stability and integrity of banking, such as establishing a
deposit insurance.

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