Economists and government officials said Yemen's commercial and Islamic banks are playing a positive role combating poverty and unemployment by funding private sector activities, particularly small and micro projects.

Total funding provided by commercial and Islamic banks to the private sector rose to 483 billion riyals by the end of September 2010, compared to 414 billion riyals at the end of the same month in 2009, according to a report issued by the Central Bank of Yemen in December last year.

"The banks are performing an important role in financing commercial and industrial activities which helps with development and assists state programmes in reducing unemployment and combating poverty," Mohammed Saad Rodi, a Central Bank deputy for the Bank Oversight Sector, told Al-Shorfa.

Rodi said, "Commercial and Islamic banks operate within a safe framework and in accordance with adequate guarantees for funding, notably by not placing depositors' funds at risk or exposing banks to potential losses. The Yemeni banking system is experiencing continuous growth in all segments, especially assets and also reserves and the savings rate, in addition to the consolidated balance sheet of banks."

Ahmed Khawi, president of the Yemeni Banks Association, told Al-Shorfa that "There is a continuous expansion of banking activities that fund the private sector, which has a direct impact on people's lives through projects that employ new workers in industry, construction or other commercial sectors."

He said financing of small enterprises turned poor families into productive households and employed workers. Success with small projects led some banks to devote special branches to microfinance.

Khawi said, however, that banks are still reluctant to finance strategic projects with large capital. He attributed this to "the volatility of interest rates for deposits and loans, going up and down from one time to the next which leaves limited funding for such projects, as it reached 20% and the banks charge 24% interest on loans. This high price makes investors very hesitant because of this rise."

Khawi said that banks are not taking risks in funding large projects because of bad debts in the private sector and prolonged judicial proceedings.

"Despite the efforts of the ministry of justice to develop the commercial courts, the number of cases is an obstacle to timely completion of cases introduced," he added.

Taha al-Faisal, an economics professor at Sanaa University told Al-Shorfa, "The positive effect on development and on the fight against poverty and unemployment is determined by knowing the type of these loans or financing, whether long or short-term and what activities are funded."

"Based upon the Central Bank report, financing for imports ranked first at 110 billion riyals, while the building and construction sector received only 35 billion, and industry received 72 billion. The important sector that must should be ranked high—agriculture and fishing sector—received only 10 billion," he said.

He said banks should increase lending to small projects because such aid provides employment opportunities and increases economic development.