Economists in Yemen have for several years now encouraged the state to move away from its dependency on oil and gas revenues to explore other avenues which would generate national growth and sustain economic development.
Many foresee that the financial sector and more particularly, the Islamic finance sector would prove a fructuous venture for a country such as Yemen where tradition and Islamic values are more prominent.
Nathan Giliano, a professor of Economics in Vancouver, Canada explained that over the past few years - since the world economy so famously land-slided on Wall Street slope - Islamic financial products had grown in popularity across the Arab world and its emerging economies.
"So far Malaysia has dominated the market, if only by the sheer size of its banking institution. However, emerging countries such as Yemen with a 20 something million market pool tag could become very attractive indeed and outweigh established competitors."
He added that already Saudi Arabia was working at becoming the Peninsula's next financial hub, replacing Bahrain.
"Mecca's Mayor, Dr. Ossama al-Bar announced in 2012 he planned to eclipse Dubai, Bahrain and Malaysia and turn his city into the banking capital of the Muslim world."
But while Mecca can claim its religious heritage by offering its clients a "cache of religious excellence", Yemeni bankers believe too their country has something to offer and certainly something to gain from boosting its Islamic banking sector.
In 2012, Mohamed Al-Farhan, an economic analyst working in Saudi Arabia emphasized that a spike in demands for Islamic financial tools led many banking institutions to study ways in which they could enhance their services to customers and create an entirely new banking culture. “The increased demand for Islamic banking services and products, such as speculation, trade credit, trading and leasing, stimulated the rapid growth of the sector,” he said, adding "this sector is unique in terms of its accounting systems because its revenue accounting, project evaluation, and partnership and speculation methods differ radically from the traditional accounting methods used worldwide.”
Economists and financial analysts are already calling Islamic financing an alternative to capitalism and socialism saying that it offered a different approach in strategy, answering the need for “moral banking”.
Islamic Banking Principles
While Islamic banking is essentially based on the principle that interests - riba in Arabic - are forbidden, it is not simply an interest-free financial structure. Islamic banking is based on Islamic economics, a complete system of social and economic justice which deals with property rights, incentive system, the allocation of resources, economic freedom and decision-making as well as the proper role of government.
Although such principles have been applied for centuries throughout the Muslim word it is only recently that such rules were transferred in their applications to private or semi-private commercial institutions.
Under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit.
At a seminar in london in 2021, Professor Henry Wilson told his audience "A contraction of western economies is leading investors to seek alternative investments strategies, putting the emphasis on safety and moral responsibility. Islamic banking answer this need."
He added “Investors and individuals realize that the capitalist banking system was not only flawed but led to criminal abuse. They are looking for more dignified way shall we say to make money. Islamic banking offers exactly that, a moral, sensible way to turn a profit. Moreover, the Islamic financial system proved to be resilient to even the harshest economic environment and this is something investors found attractive.”
And indeed, even die-hard capitalist banks are now looking into the market, wanting to attract Muslim clientele -- HSBC, Barclays, Lloyds --
Yemen move toward Islamic banking
Although Yemen has much progress to make in regards to its banking sector, the state already made some improvement in February 2011 when its central Bank first introduced Islamic sukuk to finance state-run projects.
Kamal al-Rabie explained at the time in an address to the press that “Salam sukuk were issued to help the government raise funds to purchase consumer commodities for the public. We conducted a potential market return study and determined that the profit margin would range between 15% and 18%, which offered financial benefits for the government, commercial banks and the community through the provision of strategic commodities such as oil derivatives.”
Government officials repeatedly throughout 2012 announced the government would consider modifying its current legislation as to accommodate financial products and allow Yemen financial service industry to thrive.
Economists also theorized that in a country such as Yemen where citizens are not familiar with the banking sector and do not even hold for a great majority a bank account, Islamic banking could prove a perfect bridge, generating trust and educating Yemen's next generation of entrepreneurs.
In a country such as Yemen where 40% of the population is said to be living under the poverty line with less than $2 per day, micro-finance has become a life line for many.
Islamic micro-finance is the provision of financial services for low-income populations in which the services provided is conformed to Islamic financing principles.
Islamic micro-finance providers have developed a number of financing mechanisms that can be utilized according to the nature of the commodity or business and the period for which financing is sought. These are generally known by their Arabic names. Murabaha, is the most popular and widely used Islamic financing instrument. This involves the resale of a commodity after the lender adds a specific profit margin, which is paid by the borrower who agrees to buy that commodity.
Usually, repayment is made in installments to the financier, who pays the price to the original supplier of the commodity. This type of finance is commonly used for financing assets or working capital inputs, such as raw materials, machinery or equipment.
In September 2012, an Islamic micro-finance training workshop was held in Sana'a, the capital by al-Huda Centre of Islamic Banking and Finance and Yemen micro-finance Network to raise awareness and present to the industry the new tools and products which had been developed.
Chief Executive Officer of al-Huda Centre of Islamic Banking and Economics, Muhammad Zubair Mughal said a"l-Huda has established a separate department for the promotion of Islamic micro-finance - Centre of Excellence in Islamic Micro-finance - so that awareness, consultancy and training could be provided to all micro-finance Institutions."
In modern-day conventional insurance, the insurance company sells policies and invests the proceeds for the profit of its shareholders. Payouts to policyholders may vary depending on financial performance, but a minimum positive return is always contractually guaranteed.
Takaful or most commonly referred to as Islamic insurance functions differently.
Takaful is founded on the cooperative principle and on the principle of separation between the funds and operations of shareholders, thus passing the ownership of the Insurance fund and operations to the policyholders. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.
In takaful, the policyholders are joint investors with the insurance vendor, who acts as a manager for the policyholders. The policyholders share in the investment pool's profits as well as its losses. A positive return on policies is not therefore legally guaranteed.
This new system of insurance was introduced to Yemen in 2010 by the United Insurance Company. Soon after that Yemen's main insurers followed suit, realizing the potential Islamic products had in a country were traditions and the respect of Islamic principles often by-pass profiteering.
Although Yemen has yet to perfect its financial sector, Islamic banking holds much promises for the future.