Over the past decade, Yemen\u2019s banking and economic sectors have undergone two critical phases that marked deep turning points in their trajectory and had significant repercussions for the country\u2019s financial and economic future.<\/p>\n
The first phase began with the outbreak of the armed conflict and the Houthi group\u2019s takeover of the capital, Sana\u2019a, in late 2014, followed by the intervention of the Saudi-led Military Coalition. It continued until December 2019, when the Houthi group banned the circulation of new banknotes printed by the Central Bank of Yemen (CBY) under the IRG of Yemen in Aden, an act that ushered in the second phase.<\/p>\n
Throughout these two phases, the economy experienced profound shifts that clearly affected financial and banking performance. However, the second phase proved to be the more critical and impactful one, as it produced a severe monetary division reflected in the existence of two exchange rates for the Yemeni Riyal, with a gap exceeding fivefold. This disparity negatively affected all economic, commercial, and financial sectors.<\/p>\n
In both phases, the parallel (informal) market emerged as the biggest beneficiary. During the first phase, it exploited the banking sector\u2019s shock and the Yemen Central Bank\u2019s efforts to stabilize exchange rates amid a liquidity crisis. In the second phase, the monetary split and the dual decision-making between the CBY headquarters in Aden (after its relocation) and its branch in Sana\u2019a created a fertile environment that enabled the parallel market to expand its activities and perform functions comparable to those of the formal banking sector, particularly in external transactions.<\/p>\n
This policy paper focuses on analyzing this key component of the parallel market, namely, money exchange companies and establishments that operate without licenses or fail to comply with the legal and procedural regulations governing banking activity in Yemen, in addition to individuals or entities engaging in speculative currency trading<\/p>\n