As Islamic finance makes its way into mainstream banking in Afghanistan, hopes are high that Shariah-compliant banking will provide a much-needed momentum for the country’s economy after decades of war, unrest and political instability and provide much-needed capital to rebuild the demolished infrastructure.
Afghanistan’s commercial banking system is still in a fragile state and only slowly adapting to international standards. After the Taliban rule ended in 2001, the entire sector was left devastated and banks had ceased all lending activities, which had moved into the informal sector and largely remained there in form of the hawala system.
Only with the help of the international community, the commercial banking sector came somehow on its feet in the following decades, at least in the larger cities, while the vast majority of the rural population is still unbanked with only a small percentage of Afghans currently holding bank deposits. Estimations are that currently only 5.7% of the population has dealings with the banking sector at all.
As of 2018, the country had a central bank, three state banks and about a dozen private financial institutions, three of them foreign (Pakistan), and around 400 bank branches, most of them in urban centres. Thus, banking remains highly centralised, with 75% of all loans made in Kabul Province.
For businesses and entrepreneurs, there are still huge obstacles for accessing credit through banks and other formal financial institutions which entrenches dependence on the informal credit market or on family assets. Afghanistan still has a no public debt market to speak of, which increases difficulties to finance public projects and infrastructure.
Apart from an undersupply in banking services, another reason that the vast majority of the 30-mn-population shuns commercial banks is that they seek to avoid interest-based finance for religious reasons. But even though some banks have opened Islamic windows – among them Afghan United Bank, Ghazanfar Bank and Afghanistan International Bank – products and outreach are limited.
However, with the new approach towards Islamic finance things could change. Afghanistan’s central bank, Da Afghanistan Bank, issued a regulatory framework for Islamic banking in 2015 in a move to strengthen Islamic banking by setting clear legal standards with rules based on Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, a major standard-setting institution in the Islamic finance industry.
Furthermore, this April, Afghanistan’s central bank granted a licence to the Islamic Bank of Afghanistan (IBA), the first lender in the country to apply the interest-free principles of Islamic finance in all its operations. The IBA had paid-up capital of $25mn, held $187mn of deposits as of end-2017 and operates a network of 59 branches across the country, the third-largest.—Gulf Times