The International Monetary Fund (IMF) and the World Bank are assisting Yemen on the technical aspects of issuing commercial paper under a technical agreement which the World Bank Group has with the Jeddah-based Islamic Development Bank (IDB) Group to assist its member countries to help formulate policies to raise financing for infrastructure, development and budgetary support.

This includes raising funds from the capital markets which in turn includes Shariah-compliant papers such as sukuk. The IMF has in the past assisted Iran and Sudan under its consultation programs to issue Musharaka sukuk whose proceeds were used for infrastructure development and as a monetary policy management tool. Similarly, the World Bank and the International Finance Corporation (IFC), the private sector funding arm of the World Bank Group, have also issued local currency sukuk in Malaysia and the UAE to finance some of their activities in the two regions.

At the same time the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the IDB Group, which has close links with the Yemeni government and the Islamic banking sector, is also acting in an advisory capacity in issuance of a sovereign sukuk by Yemen.

Khaled Al-Aboodi, CEO of ICD, in an earlier interview with Arab News confirmed that “we are thinking of issuing local currency sukuk in selected IDB member countries. One of the lessons of the financial crisis is the need to enhance the local currency financing in developing countries. Yemen for instance is planning a sukuk issuance before the end of the year, structured on the Sihama Musharaka sukuk in Sudan. The Bank of Sudan and the Islamic banks there are helping Yemen in this respect. If the Yemeni government issues a sukuk then that would help the Islamic banks because part of their liquidity can be channeled into this sukuk. Some of the Islamic banks in Yemen are not competitive right now. The government issues conventional bonds in the local currency and the Islamic banks cannot park their short-term liquidity in these instruments.”

The IDB group under its member country partnership strategy (MCPS), where the IDB engages with a member country and discusses at the very highest level how the IDB development strategy would help the country, is also assisting Aden in the introduction of relevant legislation to accommodate Islamic finance transactions such as sukuk origination. To date, the IDB has disbursed over $1 billion of development, trade and technical assistance financing to Yemen.

Yemen is one of the poorest member countries of the IDB. In terms of GDP per capita it is the 20th or so poorest country of the 56 member countries of the IDB. In 2007, GDP per capita totaled $555 and its external debt totaled just under $6 billion, according to IDB data.

The rationale behind a sovereign sukuk issuance is to help the government diversify its sources of budgetary financing, attract inward investment to help fund infrastructure and other projects, provide an investment outlet for local Islamic banks and conventional banks for liquidity management purposes, provide an investment outlet for local Islamic banks to park their capital and statutory reserves (a mechanism which is currently absent in the Yemeni market), and help further promote the Islamic banking sector in the Arabian Gulf country.

Yemen is unique as an Islamic banking market. In relative terms it is a nascent market, but the largest bank (out of a total of 16 banks) in the country in terms of capital, total assets and deposits is an Islamic bank, Tadhamon International Islamic Bank. The bank in 2009 accounted for 20.4 percent of the total banking sector activity in the country, according to the Central Bank of Yemen. Total assets and total deposits of Tadhamon International Islamic Bank amounted to 333.9 billion and 143.899 billion Yemeni riyals respectively in 2009 — up 17.6 percent and 18 percent on the previous year.

According to Hammam, Islamic banking has shown remarkable growth in Yemen over the last few years. The three Islamic bank assets accounted for 33 percent of total bank assets, they accounted for 43 percent of total bank loans, and 30 percent of total bank deposits in the country.

Tadhamon International Islamic Bank and the other two Islamic banks Saba Islamic Bank and the Yemen Islamic Bank for Finance & Investment together with the Cooperative & Agricultural Credit Bank have stressed that they would participate in the sovereign sukuk.

In fact, Yemen will have to heavily rely on institutions such as the IMF, IFC, IDB, ICD and some local, regional and IDB-member country financial institutions for a successful closure of any sukuk issuance. Its sovereign rating is way off the investment grade and the country’s political and economic instability has worsened over the last few years.

The IMF, for instance, forecast that Yemen’s growth rate will decline to 4.1 percent in 2011 compared with 8 percent in 2010. In its 2011 budget of 1.8 million Yemeni riyals, the government has forecast a deficit of 316.4 billion riyals, which is about 3.8 percent of GDP.

Yemen’s current foreign debt is about $6.49 billion and it has already obtained an $808 million soft loan from the Arab Monetary Fund (AMF) and a $369.8-million standby credit facility from the IMF to help finance its external borrowing requirement. Some of the proceeds of any sovereign sukuk issuance by Yemen will similarly go to close any budget-funding gap.