Beyond Financial Soundness: Rebuilding the Supervisory Framework for Microfinance Banks in Yemen

Microfinance banks in Yemen have evolved into a regulated banking sector, with supervision focused primarily on financial soundness and regulatory compliance. However, unlike commercial and investment banks, microfinance banks have a distinct developmental mission that includes expanding financial inclusion, supporting micro and small enterprises, and serving financially excluded groups.

This paper examines whether existing supervisory tools adequately assess this broader mission. It argues that while financial soundness is essential to institutional sustainability, frameworks such as CAMELS do not capture social and developmental performance. Drawing on Yemen’s legislative and supervisory framework and international approaches to microfinance social performance, the paper proposes a balanced supervisory model that combines prudential supervision with developmental performance indicators. Such an approach could help maintain financial stability while ensuring that microfinance banks are also assessed against the developmental objectives for which they were established.