Executive Summary

• Yemen's microfinance sector is undergoing a radical transformation. Despite initial success in empowering small businesses, the ongoing conflict has exposed deep vulnerabilities. Competition between the fractured central banks has driven a surge in microfinance bank (MFB) licenses. While this promises to expand financial inclusion, it raises serious concerns about long-term sustainability and financial stability.
• Several other factors are driving the transformation of existing money exchange companies into MFBs. These include the erosion of trust in the traditional banking system, the growth of the informal financial sector, and maneuvering by the exchange companies themselves. Additionally, lower entry requirements compared to conventional banks make becoming an MFB an attractive option.
• However, the surge in MFBs presents its own challenges. The divide in the Central Bank of Yemen (CBY) creates an uneven playing field, hindering financial inclusion efforts. The rapid issuance of licenses devoid of proper planning could threaten financial stability. Geographic dispersion and limited infrastructure make reaching rural populations difficult and expensive. Lack of financial literacy and a cultural aversion to debt in some regions further complicates client acquisition.
• Inexperienced staff at new MFBs also raise concerns about microfinance expertise and responsible lending practices. "Mission drift" looms large as a systemic risk, as MFBs prioritize easily reachable clients in major cities over underserved rural populations. Fierce competition could lead to unsustainable practices like excessive lending, jeopardizing the very clients these institutions aim to serve.
• Despite these challenges, MFBs hold immense potential. They can bridge the financial inclusion gap and empower underserved rural entrepreneurs. Unlike traditional donor-dependent microfinance institutions (MFIs), MFBs benefit from a sustainable financing model through customer savings. Yemen's regulatory framework also allows MFBs to offer a broader range of financial services compared to most other Arab nations.
• To ensure a sustainable future for the sector, a collaborative effort is needed from the CBY, MFBs, and international donors. The rival CBYs should institute a temporary pause on new MFB licenses and conduct a thorough assessment of the existing landscape. The regulatory framework for MFBs should be strengthened, focusing on fair competition, risk management, and client protection.
• Consolidation of MFBs’ activities and increasing focus on offerings to lower-income clientele can create stronger institutions and a more efficient financial sector. MFBs themselves must develop sustainable business models and build capacity through training and technology adoption. Collaboration is crucial to developing client outreach strategies for rural areas, potentially leveraging financial technology (FinTech) solutions. Effective risk management frameworks and a national credit information system are essential to prevent over-indebtedness. Finally, knowledge sharing and impact monitoring are necessary for continuous improvement and to guide data-driven decision-making.
• MFBs present both opportunities and challenges for Yemen's financial sector. By addressing the challenges and implementing a comprehensive strategy, MFBs can become a powerful engine for financial inclusion, economic growth, and poverty reduction in Yemen.