This study investigates the financial sustainability of local and national NGOs (L/NNGOs) in Yemen within the broader context of localization and aid effectiveness. Drawing on mixed methods—including a structured survey, key informant interviews, and secondary data analysis—it assesses the sector’s resilience across five critical dimensions: funding trends, income quality, cost recovery practices, financial health, and institutional sustainability. Findings reveal persistent disparities in funding access, limited unrestricted income, weak reserve accumulation, and significant under-recovery of administrative costs, particularly among L/NNGOs compared to INGOs. The analysis identifies systemic constraints, including overreliance on intermediary funding, lack of multi-year commitments, and restricted donor policies, which perpetuate dependency and undermine the Grand Bargain’s goals. The paper argues for structural reform to promote equitable partnerships, flexible and predictable funding, and investment in local institutional capacity. It contributes to the literature by providing empirical evidence from a protracted crisis context and proposing a localization-responsive sustainability framework tailored to Yemen. Recommendations target donors, INGOs, policymakers, and national actors committed to strengthening the sustainability and leadership of local humanitarian organizations.