From behind the fortifications of blast barriers, sandbags, razor wire and armed guards, Afghanistan’s small but growing banking sector is emerging from the destruction of more than two decades of conflict. The range of available products and services is being broadened cautiously but the sector is severely hamstrung by the weakness of the legal and regulatory regime.
The attraction of the country varies. Providing services to the large number of foreign aid organisations and their workers is big business and Afghanistan’s increasing inter-regional trade is the spur for others. Yet others, like the domestically capitalised Kabul Bank, are being bold and launching simple credit products into the local market.
Outside of the region, Afghanistan is known for little else but war. It also has the notorious distinction of being the hideout of Osama bin Laden. From December 1979, when the Soviets invaded the country to prop up the communist regime in Kabul, until December 2001, when a US-led coalition routed the ruling Taliban, the country suffered a period of virtually uninterrupted bloodshed and destruction.
Taking stock
The removal of the fundamentalist and insular Taliban provided the first opportunity to catalogue the full extent of the devastation. This revealed a country at or near the bottom of every socioeconomic indicator used to measure human and economic progress. The public institutions, physical infrastructure and the quality and competency of the civil service were all in a deplorable state.
The transitional government that assumed power in 2002 inherited a decrepit, broken-down state sector (most state-owned enterprises had ceased operation); a chronically under-developed economy (over 50% unemployment, for instance); and a population bearing the raw scars of war.
With the help of the international community, the Afghan government drafted its National Development Framework, stressing a handful of key goals, including private sector development, investment in infrastructure and governance. It is a simple but coherent approach: create an environment conducive to private sector growth, which, in turn, creates jobs and prosperity.
Bars to investment
Simultaneously, the government must wean itself off the substantial foreign aid it depends upon to fund the bulk of its recurrent expenditure and all of its capital spending. To this end, it is under pressure to mobilise revenues by taxing private enterprise and working individuals.
Yet, private sector development is inhibited by numerous challenges. The deterioration in the security situation in May and June, including the most devastating suicide bombing since the Taliban was ousted, is a sharp reminder that the country is not yet secure.
Afghanistan’s weak infrastructure poses problems on top of this. The irregular power supply necessitates the use of generators and bulk water supplies are not readily available. The country’s transport and logistics networks are far from rehabilitated and will be limited once they are. There is a serious shortage of skilled workers because most qualified Afghans fled the country and those left behind received little education and training. Specific sets of skills, such as general management and accounting, are close to non-existent.
The country’s laws and regulations – many dating back to the Soviet era – are hopelessly out of date and inappropriate, if they exist at all. Ambitious legislative reform is being held up by severe capacity constraints in ministries, meaning draft laws are not being passed into legislation. Even if laws are made, the judicial system has little capacity to enforce them.
In the face of this, key ministers and a small team of technocrats – a wafer thin layer of competent bureaucracy – are working to remove the many obstacles to private sector development.
“Our main objective is to create an environment conducive to local and foreign private investment,” says Anwar Ul-Haq Ahady, the finance minister. “We must provide security – both physical and legal – infrastructure and skills. These are the bare basics that any country must provide to attract investment. But we must also be competitive relative to our neighbours, offering tax rates and incentives that offset the risks. We will provide incentives that are greater than the risks.”
Citizens return
Something must be working. The economy has averaged more than 20% growth each year since the Taliban was overthrown, fuelled in the most part by the large injection of donor funding. Dozens, if not hundreds, of small businesses are opening their doors and, just as encouragingly, Afghans who fled the country – particularly those who went to Pakistan and Iran – are beginning to return to the country, bringing with them business ideas, start-up capital and know-how.
There is also growing prosperity. Average incomes have almost doubled since 2001, albeit on an uneven basis across the country. Education is improving and there is a growing acceptance that commerce and business are good for development.
“You just have to compare today’s Kabul to how it was a year ago. There are new businesses, more cars on the street and a lot more activity,” says John Haye, CEO of Afghanistan International Bank. One of Afghanistan’s new breed of banks, it has seed capital from American and Afghan investors, top-up funding from the Asian Development Bank and is managed by Dutch banking group ING.
Banking re-birth
Afghanistan’s banking system is best described as embryonic. International banking group Standard Chartered, National Bank of Pakistan, Habib Bank (also from Pakistan), and Punjab National Bank of India have opened branches. Other notable banks include Afghanistan International Bank, Kabul Bank and First Microfinance Bank of Afghanistan.
Aside from providing banking to the large foreign sector, including aid agencies, non-governmental organisations, embassies and the military, the Afghan banking market is small and financial intermediation is low. At the same time, the absence of key legislation, such as bankruptcy law or mortgage law, inhibits banks’ opportunities to extend services. Basic transactional facilities are offered and services such as money transfer are available. Simple credit facilities are slowly being developed.
“Because of the war, the financial sector came to an almost complete standstill. The country’s banks survived the period in name only but were not functioning at all. It was only the central bank that was able to carry out limited commercial banking operations,” says Noorullah Delawari, governor of Da Afghanistan Bank, the central bank.
The country’s financial sector is, in effect, being built from the ground up but this permits the adoption of the latest processes and technology to improve efficiency and lower costs. For instance, Mr Delawari anticipates that Afghanistan will bypass cheque facilities and build the system around electronic funds transfer instead.
With technical assistance from consultants BearingPoint, the central bank is steadily reforming the country’s financial system. New laws have been enacted, paving the way for on-going reorganisation of the central bank and the licensing of new commercial banks. Also, a new, fully-exchangeable currency – the afghani – was unveiled and has proved stable.
It is a shift in the right direction but is is not happening fast enough, says Joseph Silvanus, CEO of Standard Chartered. “Mr Delawari has been a good choice of governor,” he says.
“He comes across as extremely honest about what he can and can’t do. He has promised to lean on the relevant ministers to get the necessary laws passed because the banking system cannot be neglected any further. The financial institutions here could do so much more but they are being held back.”
