LOOPHOLES IN BANKING
Background: Banking services in the United States are highly developed. There is a wealth of data available to financial institutions about potential consumers. Overseas, however, is a different story. There are many parts of the world where there is a paucity of information regarding consumers. Yemen is one such area.
Issue: Yemeni banks had abruptly stopped lending to previously very creditworthy members of the community. This created a massive cash-flow management issue for these consumers that had implications for the U.S. Embassy. Additionally, the Yemeni banks were losing out on potentially valuable revenue streams.
At the heart of the matter was a dispute between the Yemeni banks and the U.S. Government that was being fought by proxy through consumers. Our team was called in by both sides to help find a solution. Additional complexity was introduced by Islamic banking requirements, which are different from the norms of Western finance with respect to interest.
The Yemeni banks were in essence demanding continuous verification of employment with the U.S. Government by their customers. In a country with a large Al-Qaeda presence, the U.S. Government was wary of a list of its local Yemeni employees circulating among various businesses. Complicating matters further, was a prohibition on lending to any Yemeni that worked for the security section of the U.S. Embassy in Yemen. This prohibition set off alarm bells and was viewed as a way to intimidate Yemenis to not work for the security section of the U.S. Embassy.
Insight: Our team began with data. We examined data by both the U.S. Government and the Yemeni banks. Based on our analysis, the current situation did not fit within any historical norms. Through additional analysis, we were able to trace this change in bank policy to a certain concentration of bad loans. Digging deeper, we discovered the issue.
The U.S. Embassy was considered among the best and most stable places of employment in Yemen. Many Yemeni employees who worked at the Embassy enjoyed very easy access to credit on generous terms. However, these generous terms only extended to the immediate employee of the U.S. Embassy.
Naturally, there was a loophole. Embassy employees could agree to co-sign loans for others and by virtue of their employment secure the same generous terms for others. In exchange, the employee would usually receive a "gift" for their help from those they secured credit for.
Some employees took this loophole and ran with it, effectively becoming mini-investment houses. The strategy was full-proof until layoffs happened at the U.S. Embassy. These layoffs, which were heavily concentrated in the security section, meant that those individuals could no longer effectively guarantee those loans. Shortly thereafter, the defaults began, which led to the current situation.
Strategy: Our strategy needed to be multi-prong as we had to accommodate various interests. First, we went to the banks and informed them of what our research uncovered. We recommended that they close this loophole going forward. Second, we had them identify all loans that were currently outstanding under the co-signer arrangement and work with their legal department to recall the loans and reissue them under terms that better reflected market realities. Third, we informed them that continuous employment verification was not something the U.S. Embassy would ever agree to. Additionally, the U.S. Embassy would not be providing blanket lists of employees and their sections.
What our team did negotiate was that the U.S. Embassy would provide a modified employment verification letter that stated that an individual worked for the U.S. Embassy as of the date of the letter, with their salary listed. No other identifying information would be provided including how long they had worked or for what section they worked.
Additional strategies were recommended and implemented by both the U.S. Embassy and the Yemeni banks but we are bound by confidentiality regarding those strategies and processes.
Outcome: Within weeks, lending resumed at more responsible levels. The risk to the lending portfolio had been reduced considerably while still maintaining high levels of profitability for the banks. Additionally, U.S. Government security and privacy concerns were fully allayed.