Yemen’s Financial Institution Risk Assessment Exposes Alarming High-Risk Environment
A comprehensive risk assessment conducted by international experts has revealed a high-risk environment for financial institutions in Yemen, with conflict, climate, and development risks posing significant threats to the country’s stability.
Key Pathways to Conflict
The analysis identified three key pathways that contribute to a higher risk of conflict in Yemen:
- Conflict itself: The ongoing conflict in Yemen has created an environment where financial institutions are particularly exposed to risk.
- Climate hazards: Climate-related disasters, such as droughts and floods, have significant impacts on the country’s economy and stability.
- Development challenges: Development challenges, including poverty, lack of infrastructure, and limited social protection, contribute to a high-risk environment.
Deteriorating Risk Profile
Yemen’s risk profile has been consistently deteriorating since 2010, with conflict risk and institutional risk being major contributors to this trend. The main drivers of high vulnerability in 2021 were:
- Food insecurity: Food shortages have led to increased poverty and instability.
- Water scarcity: Water scarcity has significant impacts on agriculture, industry, and household consumption.
- Corruption: Corruption is a major obstacle to economic development and stability.
Low Resilience
The country’s low resilience was attributed to:
- Limited social protection: The lack of social protection mechanisms leaves many Yemenis vulnerable to economic shocks.
- Lack of government effectiveness: Weak governance and institutional capacity hinder the country’s ability to respond to crises.
- Insufficient climate adaptation finance: Limited financial resources available for climate change adaptation measures exacerbate the risk.
Climate Hazard Risk
The report highlighted a marked deterioration in Yemen’s climate hazard risk area, driven by:
- Tenfold increase in human impact of natural disasters: Climate-related disasters have significant impacts on the country’s economy and stability.
- Slowly building resilience: While the country is slowly building resilience to these hazards through increasing financial flows for climate adaptation, more needs to be done.
Economic Risk
The economic risk area recorded a significant deterioration, driven by:
- Growing financial dependence: The country’s reliance on foreign aid and remittances makes it vulnerable to external shocks.
- Shrinking fiscal space: Limited government revenue and increasing expenses exacerbate the risk.
Violence Early-Warning System
The forecast model of the Violence Early-Warning System (ViEWS-ESCWA) project suggests that without proper risk mitigation actions, Yemen faces a high likelihood of violence.
Implications for Financial Institutions
The report’s findings have significant implications for financial institutions operating in Yemen, highlighting the need for:
- Robust risk management strategies: Financial institutions must develop robust risk management strategies to mitigate potential losses.
- Contingency planning: Financial institutions should prepare contingency plans to respond to potential crises.
In conclusion, the comprehensive risk assessment highlights the high-risk environment faced by financial institutions operating in Yemen. To mitigate potential losses, it is essential for financial institutions to adopt robust risk management strategies and develop contingency plans.