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

UNCLAS SECTION 01 OF 02 SANAA 002785 
 
SIPDIS 
 
STATE FOR NEA/ARP, EB/IPR, EB/TRD 
STATE PLEASE PASS TO USTR FOR J.BUNTIN 
STATE ALSO FOR USAID ANE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EINV KMPI YM ECON COM
SUBJECT: Services in Yemen: Legally Open For Investment 
 
REF: SANAA 1763 
 
¶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. 
 
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Insurance Industry: Open, but Few Are Willing to Risk It 
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¶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 
exception. 
 
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Telecommunications: Potential For Growth 
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¶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. 
 
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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 
oversee. 
 
¶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.