Yemen Financial Sector Diagnostics

Investment Rating - The report does not explicitly provide an investment rating for the financial sector in Yemen, but it highlights the critical need for reforms and regulatory frameworks to stabilize the sector and promote economic recovery [17][28]. Core Insights - The Yemeni economy is heavily reliant on cash due to years of conflict, which has hindered the development of formal banking and financial infrastructure, leading to limited financial inclusion and widespread informality [17][18]. - The ongoing conflict has resulted in two parallel central banks, creating inconsistencies in regulatory standards and complicating compliance for financial institutions [19][20]. - Money exchangers have become increasingly important in the Yemeni economy, providing essential financial services and credit that traditional banks are unable to offer due to liquidity constraints and operational challenges [22][26]. - The demand for credit in Yemen significantly exceeds supply, with estimates suggesting that the demand is 5 to 8 times greater than the available credit, highlighting a critical gap in financial access for businesses [28]. Summary by Sections Executive Summary - The report emphasizes the deepening reliance on cash in Yemen's economy and the limitations of the formal banking sector, which has led to a significant portion of economic activity occurring outside the regulatory framework [17][18]. Chapter 1: The Central Bank - The chapter discusses the dual central banking system in Yemen, with CBY-Aden recognized internationally and CBY-Sana'a under Houthi control, leading to regulatory inconsistencies and challenges in compliance [19][20]. Chapter 2: The Banking Sector - The banking sector's limited footprint is highlighted, with a significant decline in risk-weighted assets and a shift towards government securities, indicating a state of financial repression [21]. - The introduction of an anti-usury law poses additional challenges for traditional banks, potentially diminishing their role in the economy [21]. Chapter 3: Money Transfer & Exchange Services - Money exchangers have emerged as key players in the financial landscape, providing services that banks cannot, and their liquidity-focused business model gives them an advantage in the cash-dominated economy [22][26]. - The chapter underscores the need for regulatory frameworks to oversee money exchangers, as their unregulated status poses risks to financial stability [23][24]. Chapter 4: Access to Finance - The report identifies significant barriers to credit access for firms, with a focus on the unmet demand for credit and the role of microfinance institutions in filling some gaps [28]. - Recommendations include promoting digital financial services and improving credit guarantee schemes to enhance access to finance for SMEs [32].