* Yemen depends on imports of food by sea
* Millions of people suffering from malnutrition
* Banks wary of guaranteeing payments for food cargoes
* Country faces civil war and al Qaeda insurgency
By Jonathan Saul, Maha El Dahan and Mohammed Ghobari
LONDON/ABU DHABI, March 4 (Reuters) - Banks have cut credit lines for traders shipping food to war-torn Yemen, where ports have been battlegrounds and the financial system is grinding to a halt, choking vital supplies to an impoverished country that could face famine.
Lenders are increasingly unwilling to offer letters of credit - which guarantee that a buyer's payment to a seller will be received on time - for cargoes to a country plagued by a civil war between the government and Houthi militia as well as an al Qaeda insurgency, say banking and trading sources.
"Western international banks no longer feel comfortable processing payments and are not willing to take the risk," said an international commodities trading source active in Yemen.
"What this means is traders are saddled with even more risks and have to effectively guarantee entire cargoes, usually millions of dollars, before the prospect of getting paid," said the source, who declined to be named, citing security concerns. "There are just more and more obstacles now to bringing goods into Yemen."
Traders that procure food for Yemen are mostly smaller, private firms based locally or regionally that buy the goods from international markets. Reuters spoke to several sources who declined to be identified, also citing security concerns.
The situation has worsened rapidly in the past month after Yemen's central bank stopped providing favourable exchange rates for local traders buying rice and sugar from global markets, say the sources, further hindering trading of food, which accounts for a large proportion of the country's imports.
The decision to limit such rates to wheat and medicine - deemed more nationally crucial - was a bid to preserve fast-dwindling foreign currency reserves.
The financing difficulties have been one of the factors behind falling shipments to Yemen, according to the sources. In January, around 77 ships berthed at ports in Yemen, according to U.N. data, down from around 100 ships in March last year - when the civil war escalated - and a far cry from the hundreds of ships that called every month in previous years.
The consequences could be grave for the Arab peninsula's poorest country, which the United Nations says is "on the brink of catastrophe". It relies on seaborne imports for almost all its food and 21 million out of 26 million people are in need of humanitarian support, with over half the population suffering from malnutrition.
The war has seen a Saudi-led Arab coalition intervene in late March a year ago to seek to restore the internationally recognised government of President Abd-Rabbu Mansour Hadi, battling the Iranian-allied Houthis and forces loyal to former President Ali Abdullah Saleh.
Mohammed AlShamery, an official at Yemen's sole sugar refinery, in the northern city of Hodaida on the Red Sea, said the credit and currency curbs had added to the problems of bringing cargoes into the country.
The process had already been complicated by deteriorating security as well as inspections of vessels by Arab coalition warships hunting for weapons bound for Houthi fighters.
"You have to be in constant touch with the shippers and reassure them that everything is fine and sometimes send pictures of the area so they know it's safe," AlShamery said.
A European banking source said some banks had decided to completely withdraw from offering credit lines on food trades to Yemen. "Even if a bank is willing to process a payment, which relates to food, they have to be careful," the source added.
Trading sources said banks that had been involved in Yemen's food trade have included Commerzbank, Deutsche Bank and HSBC as well as regional Middle East banks.
Commerzbank and Deutsche Bank declined to comment. HSBC said it continued to support customers trading across the Middle East and North Africa region including Yemen "subject to relevant regulatory and commercial controls".
Yemeni banks are also feeling the pressure. Aidros Mohammed, an official with state-run National Bank of Yemen, said since the end of last year it had stopped opening letters of credit for the trade of goods in general "as outside banks have stopped dealing with us".
Watheq Ali Hamed, the manager of a store in Sanaa, said the decision by the central bank regarding rice and sugar purchases would be felt by ordinary Yemenis.
"Prices are already going up because of the war and the rise in the cost of securing the goods," he said. "The full effects of that decision will be felt going forward. Luckily, we still have some stocks."
Slowing of imports and rising prices could pose grave problems for Yemen, where areas are at risk of famine.
The country lacks sufficient seasonal rains, has limited access to farming areas and facing rising costs of agricultural supplies, a report by a U.N. food agency said in January.
More than 6,000 people have been killed - about half of them civilians - in the war, which has seen the Houthis gain control of the capital Sanaa.
Major ports have been flashpoints for fighting including the southern gateway of Aden, which has been gripped by violence since Hadi supporters seized it from Houthi forces in July. There have also been Saudi-led air strikes close to the port of Hodaida.
Adding to the turmoil, Al Qaeda in the Arabian Peninsula (AQAP) has been expanding its presence in Yemen; in February it took control of the southern town of Ahwar, months after seizing the major port city of Mukalla to the east.
Two banking sources in Yemen said restrictions on moving money abroad due to the conflict was adding to trade financing difficulties. "We have a big problem in transferring money abroad ... so we cannot open letters of credit for traders to import," one Yemeni banker said.
Trading and banking sources also said uncertainty over who was in control of Yemen's central bank - given its headquarters in Sanaa - was adding to lenders' caution. One Middle East banking source said some institutions were steering clear of transactions while Sanaa was still under Houthi control.
The central bank could not be reached for comment.
A Feb. 11 report by Yemen's Ministry of Planning and International Cooperation showed total foreign reserves of Yemen's central bank had slid to $2.1 billion by the end of 2015, from $4.7 billion at the same point in 2014.
The report said a "deterioration of the national currency value and scarcity of foreign exchange" were making it difficult to finance imports.
"In light of the ongoing conflict, the private sector has undergone painful shocks," Minister of Planning and International Cooperation Mohammed Al-Maitami wrote.
"Hundreds of thousands of workers have lost their jobs and source of income."
(Additional reporting by Tom Arnold in Dubai, Stephanie Nebehay and Tom Miles in Geneva, Michael Hogan in Hamburg, Michelle Nichols in New York and Arno Schuetze in Frankfurt; Editing by Pravin Char)
Our Standards: The Thomson Reuters Trust Principles.