Ahmed Bahakim (South24)

Banking system in Yemen

Yemen's economy is mostly cash-based, with low levels of financial inclusion. The official banking system in Yemen is severely undeveloped, undercapitalized, and concentrated only in metropolitan areas, making it unavailable to the vast majority of Yemenis. Prior to the current conflict, the Central Bank of Yemen (CBY) began reforms aimed at improving electronic interbank transactions and local electronic payment systems, including electronic and mobile money services, in order to develop Yemen's financial sector infrastructure and reduce the use of cash. Given the extensive use of mobile phones by the general public, successful reform has the potential to significantly enhance financial inclusion. However, the advent of the continuing conflict halted the progress. ^[1]

Conflicting monetary policies

Commercial and Islamic banks, microfinance banks and microcredit institutions, and money exchange firms are the three categories of financial service providers in Yemen's official domestic payment industry. The General Authority for Post and Postal Savings (GAPPS), which is managed by the government and regulated by the Ministry of Telecommunications and Information Technology, provides a variety of financial services. GAPPS allows customers to pay utility bills, although not online, for state-run firms that provide internet, energy, phone, and water services. ^[2]

Money exchange firms, on the other hand, are legally non-deposit takers, meaning they are not permitted by law to receive or accept deposits from customers. Money exchange firms are currently unregulated, and many do not comply to international financial norms.  Money exchangers are ideally positioned to provide money transfers and money exchange services to vast parts of society, particularly those living in distant rural regions. During the conflict, the number of money exchange enterprises and shops, primarily run by families, has expanded dramatically: in 2017, there were 876 such businesses recorded in Yemen; in 2019, there were 3,244. ^[3]

In September 2016, the CBY relocated its headquarters from Sanaa to Aden, leaving the central bank dispersed between two cities. This began the economic battle between the Houthi authority and CBY-Sanaa on the one side, and the internationally recognized Yemeni government and CBY-Aden on the other. Meanwhile, the CBY-Aden has had a tough time expressing its power in its territory. Nevertheless, it's officially recognized as Yemen's Central Bank, and other nations, international agencies, and financial institutions treat it as such. It also has access to global financial networks. In the years since the CBY moved, both parties have attempted to use their separate positions to impose their own competitive monetary policies., battling for control of the local currency. ^[4]

The monetary environment has been significantly distorted as a result of this. While the government and CBY-Aden resorted to printing additional money to satisfy spending expenditures owing to a lack of income and foreign currency reserves, the Houthi authorities and CBY-Sanaa sought to restrict the usage of newly created bank notes in Houthi-controlled areas. As a result, the exchange rates between 'old rial' banknotes, which are used mostly in Houthi-controlled Northern territories, and 'new rial' banknotes, which circulate across the rest of the nation, have become increasingly divergent. ^[5]

Digitizing the financial system

Financial technology is reshaping the financial services industry's future. It strives to improve client involvement and usage through digitizing major elements of banking and financial services, from online banking to blockchain tracking and online payments. Highly regulated markets, moderately regulated markets, and minimally regulated markets are the three categories of markets that control the supply of electronic money services globally. Subscribers in a nonbank-led model are not required to have a bank account or access to internet services because payment transactions are completed entirely or partially in collaboration with a mobile network operator (MNO), with banking services delivered via SMS and Unstructured Supplementary Service Data (USSD) technologies. ^[6]

The unique environment of a country is critical in deciding the best course of action for expanding e-money services. Nonbank-led models have tended to be appropriate for countries with a high level of maturity and the necessary controls in their electronic money ecosystems, or for countries where the exchange rate for domestic banknotes has collapsed and an e-currency has become a necessary alternative to maintain a reliable store of value. ^[7]

In Yemen, the implementation of an electronic rial payment system must be complemented by updated credit infrastructure, digital connection infrastructure, and financial technologies to empower e-money services. Until date, the infrastructure needed to run e-currency and e-payment systems has either been inadequate or is still being created. The RTGS, which is required for settling high-volume transactions and allowing digital interoperable payments, is still missing from the interoperable digital and financial infrastructure. Individuals and organizations are compelled to maintain several accounts and deal with different sorts of financial transactions when interoperability is lacking, resulting in inefficiencies and constraints in the usage of digital payments. ^[8]

Clients having e-money accounts at any bank that's offering mobile banking and e-wallet services have faced several challenges throughout the conflict, including the high cost and slow speed of internet services in Yemen, as well as the restricted mobile phone network coverage. Yemen has the poorest digital connection infrastructure, information and communications technology (ICT) sector, and energy provision in the Middle East and North Africa (MENA) region, all of which are necessary for the financial system and e-money service providers to function.

Yemeni mobile network operators have refused to provide unstructured supplementary service device (USSD) and integrated voice recording (IVR) services to e-payment providers because they are technologically inadequate. The USSD, an MNO-controlled communication channel, is crucial for securely delivering mobile financial services to all cell phones via encrypted SMS text messaging. If adopted, this method would result in cheaper costs than the current paradigm of providing e-money services through banks. Because there is no USSD service, it is difficult to reach illiterate and low-income people who reside in rural regions, do not possess smartphones, and are not linked to the internet. ^[9]

During the conflict, internet connectivity and electricity supply have been harmed. The damage to the undersea cable in 2020, has knocked off 80% percent of Yemen's internet capacity, making it difficult to perform commercial and financial activities across the country. When the internet service is down or the working speed is poor, the smartphone applications that handle the e-rial payment do not work. On January 21, 2022, a Saudi-led Coalition attack on a telecom building in the Red Sea city of Hudaydah cut out electricity to the country's principal internet access point, resulting in a large-scale and full internet blackout in various parts of the country for four days. ^[10]

Summary

Yemen's electrical supply, which was already poor before the war, has further deteriorated as a result of the ongoing conflict, with infrastructure strikes and fuel shortages cutting off the bulk of the country's population from grid-supplied electricity. ^[11] Financial firms that rely significantly on Yemen's internet infrastructure to deliver digital financial services would undoubtedly be harmed if the energy supply remained unstable. Through expanding and facilitating financial inclusion, improved digital financial services and electronic money might be revolutionary in addressing Yemen's humanitarian catastrophe. Given the country's present political chaos, fragmentation in monetary policy and regulation among rival central banks, and the country's poor e-payment infrastructure, broad adoption of e-money services seems to be improbable. 

Ahmed Salem Bahakim 

Energy researcher 

Photo: Rockspace technology

References: 

[1] USAID, "Modernizing Money in Yemen," 06 08 2021. [Online]. Available: usaid.gov. [Accessed 03 2022]. 

[2] S. Ahmed, "CAPITAL STRUCTURE AND BANK PERFORMANCE OF ISLAMIC AND COMMERCIAL IN YEMEN," International Journal of Research, 12 2021. [Online]. Available: granthaalayahpublication.org. [Accessed 03 2022]. 

[3] "Yemen money exchange offices 'partially' resume operations in Aden," Middle East Monitor, 07 12 2020. [Online]. Available: middleeastmonitor.com. [Accessed 03 2022]. 

[4] Y. a. CBY-Aden, "Project proposal: providing banking services to international organizations operating in Yemen under the supervision of the Central Bank in Aden," 2019. [Online]. Available: ecyemen.com. [Accessed 03 2022]. 

[5] Y. E. T. Initiative, "YETI dashboard maintained by ACAPS," YETI, 2021. [Online]. Available: yemen.yeti.acaps.org [Accessed 03 2022]. 

[6] F. Magazine, "Futuristic Predictions for the Fintech Industry by 2050," 04 01 2022. [Online]. Available: fintechmagazine.com. [Accessed 03 2022]. 

[7] EABW, "Somaliland adopts e-shilling payment service for civil servants," 15 01 2020. [Online]. Available: busiweek.com. [Accessed 03 2020]. 

[8] R. Mogielnicki, "The Yemeni E-rial: A Digital Projection of Monetary Authority," The Arab Gulf States Institute in Washington, 11 02 2020. [Online]. Available: agsiw.org. [Accessed 03 2022].

[9] R.A.M., "Yemen - Telecoms, Mobile and Broadband - Statistics and Analyses," Research and Markets, 2022. [Online]. Available: researchandmarkets.com [Accessed 03 2022].

[10] Reuters, "Yemenis struggle without internet for third day after air strikes," 23 01 2022. [Online]. Available: reuters.com [Accessed 03 2022]. 

[11] A. Bahakim, "Electricity Utilities Crisis in Aden," South24 Center for News and Studies, 09 03 2022. [Online]. Available: south24.net. [Accessed 03 2022].