Posted in:
Business & Economy
Written By: Faisal Darem
Article Date: Apr 26, 2008 - 1:01:10 AM
Commercial banks don’t expand lending and investment activities because of their risks.
Commercial banks have rejected the decision of the Central Bank of Yemen to reduce the mandatory reserve ratio of riyal deposits from ten percent to seven percent, in addition to the cancellation of the reserves’ banking interest. This interest forms ten percent of the reserve that is annually paid to commercial banks by CBY.
The decision will additionally reduce the compulsory reserve rate of current accounts and fixed deposits or similar obligations to seven percent. Ahmed al-Samawi, Governor of CBY, explained how the decision is essential for development and for supporting the banking sector in terms of increasing its potential for lending activities and investment.
In his lecture at the University of Dhamar last week, he said, “The decision will release banking assets to be used for loans to investors and other private parties. The CBY will eliminate the financial burdens that form the interest paid to banks, saving big amounts of money paid as interest to commercial banks on those reserves.”
The resolution was met keeping in mind the interests of commercial banks that have YR17 billion of the mandatory reserves at hand to make use of. This motion aims to achieve a genuine equality between the commercial and Islamic banks which do not gain any profits of interest on their reserves, said Nabil al-Muntaser, the Undersecretary of CBY.
He attributed the commercial banks’ refusal to their fear of investment and loan expansion due to their possible risks.
Unfortunately, the CBY pays more than YR6 billion annually in interest on those reserves to commercial banks. Commercial banks oppose this resolution since they are profiting from its reserves and investments in treasury bills without any effort.
On March 9, the Yemeni Bankers Association expressed its refusal to the proposal by sending a letter to the governor of the CBY, clearly making him aware of the sudden financial losses that the commercial banks will face.
In the letter, the Yemeni Bankers Association suggested that the CBY reduce the credit interest rate from thirteen percent to eleven percent to counterbalance the interest cancellation and reduction of treasury bill profits. It explained how the decision negatively impacts bank revenues, especially during this time when banks are working to modernize, develop and restore its cadres and employees.
It also put forward the idea to reduce the compulsory reserve ratio on riyal deposits from ten percent to seven percent for current accounts and to reduce the reserve ratio on fixed deposit and savings accounts to two and a half percent.
The Central Bank of Yemen paid no heed to these suggestions and failed to respond to the proposals of the Yemeni Bankers Association. Even though the decision of CBY came late, it was a step in the right direction toward supporting development, said Faisal al-Mokhlafi, Professor of Economy at Sana’a University.
Yemen is one of the few countries to pay interest to commercial banks because of its compulsory reserves. This resolution would have to deal with the amount of money paid as interest by the CBY to commercial banks, “al-Mokhlafi said. “I consider the refusal by commercial banks to be an indication that these banks want to continue relying on the government table.”
He continued, questioning the resolution by asking if its goals will be achieved through the release of the banks’ reserves. “Are commercial banks going to offer reserves to investors as loans, or do banks intend to invest those amounts by purchasing treasury bills? If this is the case, commercial banks will be paid an interest of fifteen percent instead of ten percent.”
Motivating banks to participate in lending activities and investment needs to be done by establishing an encouragement policy to promote commercial banks to invest in various commercial activities and provision of loans to investors, said al-Mokhlafi. “I think that if the CBY was able to find the means to guarantee recovery of the commercial banks’ money from borrowers, then the commercial banks would not wait to receive ten percent interest from reserves or fifteen percent of the profits from treasury bills since it would have already been getting between eighteen to twenty percent from loans given to investors.
It’s a wonder how banks will be encouraged to invest and provide loans to investors in Yemen, due to the fact that the CBY invests its money abroad to pay for the benefits and interest of commercial banks. The Central Bank of Yemen is considered to be the pioneer in commercial banking, yet it practices this role by maintaining the stability of local currency against hard currency instead of improving the banking sector.
“Development will not benefit from this decision because releasing just three percent of the commercial banks’ mandatory reserve does not contribute enough to finance one huge project,” said Dr. Mohammed Afandi, member of the Shura Council.
Afandi said that he does not think that the banks will expand lending and investment activities in Yemen because the risk ratio of recovery of the lent money is still very high, and because of this, commercial banks practice in unreal fields such as treasury bills.
