Governance and Resilience: Preparing for Post-Conflict Recovery in Yemen

By Farhad Peikar

A post-conflict situation in Yemen will present a unique set of challenges ranging from immediate humanitarian needs for affected populations, to recovery, reconstruction, and state and peace-building efforts. Such challenges will require early recovery efforts with multidisciplinary approaches that cover not only the humanitarian necessities, but that also address development and economic growth, particularly through the private sector. 

In contribution to both supporting the population through the current crisis and preparing for future recovery efforts, the MENA Transition Fund financed a project, the Crisis Support to Microfinance Institutions in Yemen, in mid-2016. Implemented by the International Finance Cooperation (IFC), the project aims to support two Microfinance Institutions (MFIs) develop new products and secure their resilience – efforts that will be critical throughout the post-conflict period. 

The implementation of the project comes at a time when the country is still in a period of conflict and political instability, adversely affecting the country’s economy, and its small businesses. Even before the outbreak of conflict in early 2015, Yemen was already one of the poorest countries in the Middle East and North Africa region. It continues to grapple with alarming levels of poverty and unemployment, which stood at more than 50 and 40 percent respectively based on 2012 statistics. Unemployment rates among youth, who make up close to half of the population, are even more alarming. 

Yemen’s financial sector remains highly underdeveloped. Only 6 percent of individuals aged 15 or above having an account with a formal financial institution according to a World Bank Findex report (2014). The outbreak of conflict has increased financial challenges even more dramatically, forcing MFIs to focus more on their own survival and stability, and cut down on lending at a time when few entrepreneurs have an appetite to open new businesses and few small businesses want to expand their current operations. Additionally, due to this lack of demand from clients for loans, which make up an important part of MFI revenues, many institutions have had to reduce the size of staffing to limit core expenses or switch to other products and services, such as cash transfers to support humanitarian efforts or other payments and remittances.


Preparing Al Amal for in and post conflict engagement

Under the auspices of the Transition Fund project, IFC is supporting Al Amal Bank to develop both Small and Medium Enterprise (SME) and Home Improvement lending products. These two new products are critical to post-conflict recovery. Housing and home improvements loans will help families and small businesses repair homes or businesses that were damaged during the conflict, while financial support for SMEs will help restart businesses that are often crucial for reconstruction, economic growth and employment creation. 

The project’s assistance to Al Amal comes at an important juncture, as over 24,600 of the bank’s clients have lost their businesses during the conflict. The fighting has also left at least six of its clients killed, 106 injured, and 1,171 others displaced. The impact of conflict on businesses and economic development throughout the country is staggeringly higher.

The support on SME lending, currently being piloted across three branches in Sana’a, also helps Al Amal execute its newly formed contingency plan, which requires the bank to support businesses that provide critical items such as food, medicine and medical appliances, building materials, solar and green energy and drinking water stations. Since September 2016, the bank has received 21 loan requests, 11 of which have already been approved for financing and 10 of which were disbursed to small businesses by December 2016, for a value of $128,152. While the results may be modest, the pilot’s focus is primarily on learning new methods and identifying the right SMEs in key sectors so that support could be scaled up during post-conflict.


Ensuring resilience of Al Kuraimi bank

The project’s activities with Al Kuraimi Islamic Microfinance Bank (KIMB) are designed in a two-pronged approach to fortify and build the capacity of the bank and ensure it survives the conflict, as well as to build its capacity in key areas to prepare them for a post-conflict setting when the bank can resume its growth and outreach. 

To start, the project has been working on two key areas: HR and Internal Control. In light of staff reductions linked to reduced operations during the conflict, IFC helped the bank introduce a performance management system. This system aims to aid the bank more equitably understand staff performance, in order to advance high performers and exit low performers. Moreover, IFC has been helping KIMB fortify controls throughout its operations both to ensure that key risks are minimized during the conflict, and to scale up in post-conflict Yemen when the time comes. 

Despite the challenges emanating from the current conflict, and the necessity of providing much of the support off-site, IFC plans to work with the bank in other core areas, including IT/MIS, corporate governance and mobile/agent-banking.

“We may be proceeding a bit more slowly, given the challenges on the ground in Yemen and the banks’ reluctance to move quickly on many areas at once,” says Matthew Leonard, IFC’s Program Manager for the Microfinance Advisory Program in MENA. “However, given the ongoing conflict, the engagement of the IFC and the Transition Fund are still very significant.” 


South-South knowledge exchange

Prior to the formal commencement of activities, and despite closing its mission in Yemen due to the conflict, IFC remained engaged with both Al Amal and Al Kuraimi remotely, including on managing non-performing loans (NPL). As part of a south-south knowledge exchange, IFC arranged conference calls between the two banks and several regional institutions, including Al Majmoua in Lebanon, ENDA in Tunisia, and most recently - the First Microfinance Institution (FMFI) in Syria. All have undergone similar crises, and were able to share lessons learned on handling a portfolio at a time of difficulty. FMFI in particular has successfully managed the NPLs during the recent Syrian conflict. 

This knowledge exchange between regional peers has helped spur changes in the collections and lending strategy on the part of these two MFIs, based on higher figures reflected in their July-December 2016 bi-annual report. 

The ongoing political crisis in Yemen will mean that financial services and private sector investment will continue to be strained, and efforts to support them might face bottlenecks or may not proceed as originally envisaged.

Working during the conflict, the IFC team has learned two lessons:

“Oftentimes, more time is needed to accomplish tasks, given both the inability to work on site directly and the MFIs’ own lack of resources or reluctance to move quickly during a time of crisis,” Leonard said. “Secondly, priorities may shift or need to be adapted somewhat based on prevailing needs of the moment, or because of evolving circumstances,” he added.