Cashing in on mobility

Published in The Gulf, 1 August 2015

Can new e-money services alleviate some of the difficulties facing Yemenis during wartime?

Times of war are times of hardship, when meeting even simple needs can become complex if not impossible. That is certainly the case in Yemen these days. The UN says that 12.9 million Yemenis are in need of food aid and 15.2 million are in need of basic health care.

The economy is also spiralling downwards at a depressingly fast rate. The IMF reckons that oil production is 40 per cent lower than it was a year ago, public revenues and spending are down by a third and youth unemployment is running at around 40 per cent.

There will be no economic recovery without a political solution, and for as long as that remains elusive many aspects of day-to-day life will be tough. To take one example, according to the Central Bank of Yemen a third of bank branches are closed as a result of the ongoing war, which is undermining the ability of people to carry out even simple transactions.

“Around 30 to 40 per cent of all bank branches are closed. Many people have lost their business. Some customers cannot withdraw money from their bank account,” says Mansour Rageh, deputy manager for Islamic and specialist banks at the central bank.

One partial solution to the problem of bank closures is now on the horizon. In December, the central bank issued a new set of regulations covering e-money and mobile banking, with support from the World Bank and organisations such as USAID, the Consultative Group to Assist the Poor (CGAP) and German international development agency GIZ. It may seem incongruous for the central bank to focus on such matters in the current environment, and it will certainly not solve any of the big problems facing the country, but it may at least alleviate some of the symptoms, particularly among poorer Yemenis.

Yemen is in any case one of the most ‘under-banked’ countries in the world. According to the World Bank, there are only two commercial bank branches for every 100,000 adults in Yemen, compared to a global average of 12 branches. Only six per cent of adults have an account at a formal financial institution, with the figure for women at less than two per cent. All that means it is expensive and difficult for people to send or receive money, to save for the future or take out loans to build up a business.

“Yemen’s financial inclusion level is abysmal. It’s as bad as it gets,” says one finance industry executive.

The lack of financial inclusion is a problem that the central bank has been trying to tackle since at least 2009, when it unveiled a set of microfinance regulations. That has been relatively successful. According to the Washington-based Microfinance Information Exchange, there are now 11 microfinance institutions in Yemen and between them they have 117,000 borrowers and outstanding loans of $51 million. Some of these institutions also accept deposits. It is estimated there are 370,000 account holders with deposits totalling almost $138 million.

Mohamed Khaled, Middle East programme manager for microfinance at the International Finance Corporation (IFC), says that Yemen has one of the most supportive regulatory frameworks for microfinance in the region.

Even so, there are plenty of gaps in the system. Yemen has a large population spread out over a wide geographic area. That makes it hard for traditional banks, which rely on expensive branch networks to reach out to the population. Even microfinance banks, which have far lower costs, can find it tough to make a profit in such an environment.

“There are 26 million people in Yemen, but the population is very scattered and that makes it very difficult for banks, even microfinance banks, to target them. Most people live in rural areas where there are no banks or any financial institutions,” says Rageh. “So we began to think about mobile banking and how we can use it to reach most of the population.”

While there are just two million bank accounts in Yemen, there are around 16 million mobile phone users. That looks like fertile ground for the sort of e-money services that have proven so successful elsewhere in the world and have been an important tool in reducing levels of poverty. Such services first emerged in east Africa, in places like Kenya and Tanzania. Now, according to the GSMA, a mobile industry trade body, there are 255 mobile money services up and running in 89 countries.

Yemen’s new mobile banking regulations cover a range of services, including transferring money between e-money accounts, and traditional bank accounts and paying utility bills. Rageh is hopeful that the services will prove useful, particularly given the extent of bank branch closures.

“Right now there are areas in Yemen where the banks are closed and people cannot send money. They have to go to Sana’a or another big city where branches are still open, which is difficult for them,” he says. “So I think mobile banking will be very helpful.”

However, Yemen may have missed a trick in taking a rather conservative approach. During the process of developing the regulations, the Alliance for Financial Inclusion (AFI), a non-profit body, helped to arrange a peer-review of the draft rules, with the authorities in Kenya, Tanzania, Bangladesh, Zambia and Panama all offering their advice.

“Mobile financial services in Kenya, Tanzania and Bangladesh are quite developed so I’m sure the regulations benefitted from that,” says Klaus Prochaska, head of policy analysis and capacity building at the AFI.

However, rather than following the lead of some of these African countries in allowing telecoms operators and others to launch services independently of banks, Yemen is insisting that banks alone issue e-money. While this conservative approach adopted may prove to be successful in the long-run, it is likely to take longer for any momentum to build up.

“In a difficult environment where infrastructure is really challenging like in Yemen, there would probably have been quicker and easier wins if they allowed non-banks to issue e-money,” says the industry executive.

One advantage of allowing telcos into the front line is that they tend to be better than banks at building up distribution networks and they are used to handling relatively small amounts of money in a cost-efficient way. In comparison, banks tend to be more risk-averse and slower moving.

Certainly, the development in Yemen has got off to a slow start. Since December, just three institutions have applied for licences, but two of those have suspended their applications while they focus on looking after their main business during the war. At the moment, the central bank says that only one institution is pushing ahead with an application, Al Kuraimi Islamic Microfinance Bank.

Having said that, bank-led mobile services have proved to be a success in some other markets in Asia, such as Bangladesh and Pakistan. Prochaska says there is no perfect model for mobile banking services and different things work in different countries.

“For the Central Bank of Yemen to have financial inclusion on their radar is a great thing. They’re doing the best they can in their situation,” he says. “There is ‘no one size fits all’ model. In some countries it takes off, in other countries it doesn’t. It’s anybody’s guess if it will work well in Yemen.

“Having the regulations is a very important start but that’s when the work for the provider starts. It’s now in the hand of the providers to design and offer services that meet the needs of potential customers, especially the poor.”

The war is making it more difficult to set up the new services than would otherwise be the case, but the central bank is trying to be accommodating, for example in the way that it checks whether a bank’s IT system is viable.

“Under the regulations, a bank’s IT system and platform needs to be tested by a third party to ensure that it is suitable for mobile banking, but there is no company, which can do that in Yemen and right now it is difficult for banks to bring experts from outside the country into Yemen. So we will try to use our IT staff to test the system. We will try to be more flexible on that point,” says Rageh.

In the meantime, other microfinance institutions are finding that the war is making it difficult for them to continue with their normal operations too. The US-based peer-to-peer lending firm Kiva, which works in Yemen via Al Amal Microfinance Bank, says that its local partner has suspended making loans in Yemen and Kiva says that it expects to see increasing rates of non-performing loans there.

All this highlights both the difficulty of offering financial services during wartime, but also the potentially useful role that mobile banking could play. After all, it can continue operating for as long as a customer is able to get a mobile phone signal.

“As long as you have mobile reception and a functional agent network, you can put cash in and take cash out,” says Prochaska. “I’d say that e-money is more crisis-resistant than a traditional bank branch. In Somalia, with its well-known stability issues, mobile banking has been very popular at times when it was dangerous to walk on the street. Cash can be stolen, but if your cell phone is stolen you still need a PIN code and without that they can’t steal from your mobile money account.”