Afghanistan seems like a country which is tailor-made for Islamic finance, but it still doesn't have a single Islamic bank. However, moves are afoot to bring it to the country. Mike Gallagher reports from Kabul on efforts to turn the economy around using Islamic finance
Afghanistan has rarely been out of the news over the past nine years, as around 40 countries have been endeavouring to turn the country from one of the poorest (with a per capita GDP of around $1000) to something more stable and prosperous. The economy, after years of desperate hardship has been growing at around 10 per cent a year, admittedly from a very low base.
The banking system has been created virtually from scratch and the Central Bank of Afghanistan or Da Afghanistan Bank (DAB), as it is better known, is at the forefront of the change, although the transformation not has been without its challenges.
The country has 17 (mostly private) banks including a number of foreign banks such as Standard Chartered, Punjab National Bank, National Bank of Pakistan, Habib Bank (also from Pakistan) and Bank Alfalah (whose Chairman is HE Sheikh Hamdan Bin Mubarak Al Nahayan from Abu Dhabi). Two of Afghanistan's banks are state-owned, those being Bank-e-Millie Afghan and Pashtany Bank.
The country has come a long way since the Central Bank went through a fairly comprehensive overhaul of its regulations at the end of 2003. It reduced the number of state-owned banks, which at the time numbered more than half a dozen, merged and consolidated a few more and went about vigourously trying to bring banking standards up to those of its near neighbours, such as Pakistan or Iran.
In 2009 Da Afghanistan Bank embarked on a five year plan to upgrade banking standards throughout the country as part of a broader plan to make the economy meet its much vaunted potential, under the slogan 'Fostering price stability and building a robust financial system.'
"Price pressures emanating from global commodity markets, a highly dollarised economy, a large informal and illicit sector, the global recession, the rising economic importance of China and India, terrorism, internet-based financial activities and volatile donor aid flows make the protection of our financial system and the maintenance of price stability a challenging endeavour," said Abdul Qadir Fitrat, DAB's Governor.
"Approaches that addressed the needs of the past must give way to policies, processes and analytical techniques that meet present and future realities," the Governor said bluntly.
The Governor explained that the five-year plan will be operationalised through successive Annual Work Plans (AWPs). "The allocation of resources for each department's Annual Work Plan will be guided by the priorities given under the Strategic Plan. In order to assess the progress, the Strategic Plan itself is a living document which will be reviewed and monitored quarterly, biannually and annually. We will measure our success through stakeholders' surveys and other quantitative and qualitative performance indicators," he said.
Part of this the plan involves the introduction of Islamic finance, which technically does not exist in the country, which has a population of 30 million. Only a tiny proportion has a bank account and there is a belief that, extreme poverty apart, it has something to do with a general desire for
Islamic banking.
Organisations like FINCA Afghanistan have developed Shari'ah-compliant microfinance products. FINCA Afghanistan offers three core products: two solidarity group lending programmes, the Women's Murabaha Group and the Market Murabaha Group, and a collateralised individual lending programme, the Business Murabaha Agreement. FINCA currently has over 10,000 clients with an average loan size of $385.
A number of banks (Kabul Bank, Ghazanfer Bank, Alfalah Bank, Azizi Bank and Bank-e-Milli Afghan) have Islamic windows, are effectively operating in a regulatory grey area, but nevertheless are keen to get the word out to the general population about what they are offering.
"Afghanistan is a Muslim society and many people don't want to use conventional banking," Sayed Mahmood-ul-Hassan, the Chief Executive of Afghan United Bank told Bloomberg. "We want to bring all of the money that we have in businesses and with individuals into the economic cycle."
DAB has set up a Islamic Banking Division with a Financial Supervision Department to cater to all of its aspects and hopes to have Islamic finance up and running by June 2011. It has drafted a law on Islamic banking and finance, which is currently under review at DAB and which it hopes should be approved by the Parliament by June 2011. After that, DAB will work to prepare the regulations to license fully fledged Islamic banks and permit them to offer their products.
Mohammad Qaseem Rahimi, the Director General of the Financial Supervision Department at Da Afghanistan Bank, told Islamic Business & Finance in an interview in Kabul that the products being offered initially would be simple and straightforward, like Wadi'ah, Mudarabah and Musharaka.
"The demand for Islamic banking in Afghanistan is very high and surveys show that most of the businessmen want to put their money in banks, but they don't because of the lack of Islamic banks," Rahimi said as he explained the huge scope for growth for Islamic finance in the country.
Bank-E-Milie Afghan has undergone an extensive overhaul of its facilities, including its core banking system, and during a guided tour of its headquarters in Kabul, Islamic Business & Finance magazine was shown around its Islamic window as its officials extolled the virtues of its Islamic finance products.
"The challenge for the DAB is how best to promote Islamic banking in parallel to the development of conventional banking industry in an integrated and gradual manner," the 2009-2014 plan noted.
"The regulatory goal should be to offer an alternative avenue of financial intermediation which is competitive and promotes efficient allocation of resources in a sound manner. Licensing criteria must be carefully considered for the long- term sustainability and confidence in the Islamic banking sector. In some jurisdictions regulators have allowed dual systems whereby it issues some additional policies and regulations for Islamic banks over and above the prudential regulatory framework for conventional banks. DAB will need to put in place a comprehensive and multi-tiered Shari'ah compliance mechanism to lend customers and investors confidence in the Islamic banking industry."
DAB is reported to be offering three licences for Islamic banks, once the Islamic banking law has been given the go-ahead by the Government, and Islamic banks from Pakistan are keen to provide the necessary expertise to help them get up and running. Staffing problems, which Islamic banks all over the world suffer from, are especially acute in Afghanistan, although DAB has provided its staff with extensive training as far afield as Malaysia and Bahrain.
Corporate governance is another area that DAB frankly admits is a challenge if concerns by investors, Islamic finance or otherwise, are to be assuaged.
"Corporate governance has been a problem in the banks," said Rahimi. "One of the future plans is to amend our Banking Law. There are some gaps, because the law was created in 2003 and now we have to review and amend it to cover all areas of banking. We are in the process of amending our laws and regulations and there will be a lot of good changes in the law. The most important regulation we are going to bring some changes to is in corporate governance."
A case in point has been the run on Kabul Bank after the dismissal by DAB of a number of senior executives (including the bank's Chairman and the Chief Executive) of Kabul Bank, which handles payments to Government workers amidst allegations of corruption. Rumours of a US Government bailout were denied by US Deputy Treasury Secretary Neal Wolin. "While we are providing technical assistance to the Afghan Government, no American taxpayer funds will be used to support Kabul Bank," he told journalists.
Governor Fitrat rejected reports that the dismissals had anything to do with the allegations of corruption, and insisted that it was a regulatory matter as shareholders cannot hold senior management positions.
Rahimi, whose infectious enthusiasm and eagerness to be part of the young DAB team which is trying to rebuild a ruined economy, does not mince his words when he discusses the challenges of fostering and enforcing a culture of corporate governance at banks in Afghanistan. "We are facing a lot of problems by bringing these changes. It is getting better, but it is a very tough job," he says determinedly.
Rahimi's comments were echoed by DAB Governor Fitrat in his 2009-2014 plan. "The strategic plan places great emphasis on good corporate governance. The pursuit of good corporate governance will require the devotion of significant resources to fine-tuning the systems for corporate goal setting and evaluation, management relationships, Supreme Council oversight, internal control, risk management, adoption of international best practice, accommodating stakeholders' interests, and corporate social responsibility."
If the spread of Islamic banking is being hindered by a lack of regulation, it could be helped by the popularity of the mobile phone. Roughly 10 million mobile phones are in use in Afghanistan, out of a population of 30 million people and DAB has been active in that area too.
"Extending the outreach of financial services to un-banked, under-served areas and communities in a cost effective way is an important ingredient in deepening financial markets. Branchless or mobile banking is an efficient and cost effective way to extend financial services to un-banked communities," says the DAB Strategy paper.
"A wide spectrum of branchless banking models is emerging. These models are distinguished primarily by who establishes the relationship (account opening, deposit taking, lending) with the customer: a bank or a telecommunications company (non-bank). Models of branchless banking can be classified into three broad categories: bank-focused, bank-led and non-bank led."
The boom in remittance services that banks, conventional and Islamic are offering is being seen as one way, via mobile phones, to increase the reach of Islamic finance amongst Afghanistan's under-banked. As the President of Pakistan-based MCB Bank notes (on page 47 of this magazine), there is usually enough numerical literacy amongst mobile phone owners to be able to send and receive texts and undertake simple transactions.
The country's low literacy rate (43 per cent for males and just 12 per cent for females) is undoubtedly a challenge, but not an insurmountable one. Having enough power to charge a mobile phone is another matter - only 10 per cent of the population (up from six per cent in 2001) have access to electricity.
"One good thing about the service providers is that they have voice-assisted or operator-assisted functions, in case you can't use all of a mobile phone's functions properly for mobile banking and it will instruct you if you want to send or receive money," Rahimi said. "It is in three languages, English, Dari and Pashtu, so the organisations which are involved in mobile banking have thought about this sort of thing to attract customers."
In early 2009, telecommunications provider Roshan launched M-Paisa ('The Hawala on your mobile!'). The service allows customers to deposit/withdraw, send and receive money, receive salaries and receive and repay loans. "You can receive and repay a loan from FMFB (The First Micro Finance Bank)," the company says.
"Over 97 per cent of the Afghan population does not have access to banking services. By making financial services accessible to all social groups, we are helping Afghans access the benefits of a market economy and fuel economic and democratic progress" said Karim Khoja, Roshan's Chief Executive.
With much talk of troop withdrawals and the increasing unpopularity of the war abroad and at home, all parties seem to be keen to shore up the economy and use any kind of economic turnaround to head off the kind of situations that drives people, especially young men, to take up arms.
Can Islamic finance save Afghanistan?
Approaches that addressed the needs of the past must give way to policies, processes and analytical techniques that meet present and future realities
© Islamic Business and Finance 2010
