Afghanistan has targeted a transformation period between 2015 to 2024 to achieve self-sufficiency. The economy is heavily dependent on development aid and economy of war. This is not sustainable and can shrink or collapse at any time. To avoid that, national and international entrepreneurs can play a constructive role in the economic development of this country and to do so it is needed to improve the banking system. A bank is normally a commercial profit earning institution which facilitates on the spot access to cash and loans for individuals and firms to encourage formal economy and growth. In addition, a bank is a financial-watchdog which prevents suspicious financial transactions and informs the financial inspectors to keep the economy safe. However, Afghanistan is an old country and it is difficult to teach new tricks in a short time.
A new constitution signed on 2004 which modifies economic regime from a state controlled economy to an open market economy. Thereafter, national financial actors (whose businesses had been running on an honor based eight-century old financial system (Hawala) that was common alongside the Silk-Road involving a large number of money service providers and informal value transfers), took the initiative and invested in the banking sector.
The conventional banking system is considered formal and it is not run based on honor. Though, it is a system with banking governance and operations focused on risk management, compliance, and remuneration. A major responsibility of a Central Bank is to issue regulations, guidelines, instructions and supervise all sorts of financial activities.
The management of a formal financial institution interconnected in the global banking system requires highly qualified and experienced personnel and political goodwill to improve economy and life of people of Afghanistan. This deficiency led to collapse of the Kabul Bank, a leading private bank in Afghanistan.
The author of this study is keen to understand the effectiveness of the Central Bank on its supervision and regulatory role after collapse of the Kabul Bank and used an approach of mixed-methods triangulation. The data collected through an online form by asking open-ended-question and closed-ended-question followed by phone call interview to an audience employed in the public banks, private banks and money market. The participants were engaged in the financial sector between 4 to 13 years.
Now, fifteen private banks with assets of nearly $4.17 billion total, deposits of $3.7 billion and a ratio of 18.78 percent loan to deposit, three state banks and three branches of neighboring banks are in operation in Afghanistan. There are roughly 300 money services providers and foreign exchange dealers, their total assets and loans are unknown and this is the only market where the Central Bank sets value of the national currency.
The lending services of banking system is limited to Business loans. A facilitation of personal loan, mortgage and overdraft is very difficult and perhaps a reform is required. A fiasco in the legal system on the enforcement of the property rights or deeds to be used as warranty is not viable now. This will facilitate accession to loans and generate wealth for the government and facilitate operation of formal financial institutions. Thus, a closed legal system leads to informal financial sources such as family, friends, relatives, and or money brokers which is small in scope and cannot effectively help economic growth. On the other hand, absence of a regulatory framework and a transparent mechanism to prevent fraudulent loans and can cause fiscal crisis. Nevertheless, improvement in the area of property rights was a major promise of President Mohammad Ashraf Ghani’s campaign.
A mechanism to help banks to detect members of criminal groups, drug dealers and land grabbers does not exist. Therefore, accession to financial services is open for them. For normal customer absence of a building code is an issue and the banks cannot properly communicate. This situation made communication between banks and customers difficult and all the interviewees have consensus on the difficulty of retaking loans.
The executive layer of the private banks is run by Indian and Pakistani experts. The professional personnel to run a bank has not been very well developed during the past decade. An interviewee said: “at most, the bankers hire low qualified Afghan employees to decrease costs. Perhaps there are high qualified Afghan experts but they will not be hired unless they have some common interest. By hiring Indian and Pakistani experts is a win-win situation for both, the banker suspicious banking activities will not leak out to the media and the experts will enjoy high salary and many other job allowances and benefits.” One interviewee himself was a high school graduate when he was hired in the bank.
The banking law has been violated where banker directly invested on different businesses and vicious-source-money transferred abroad. One respondent said “even money from neighboring countries of Iran and Pakistan had transferred to Afghanistan and then transferred to the United Arab Emirates and China to import goods and products. It is a mechanism to escape tax, transferee fees, time taking paperwork and economic sanctions. Transferring money to Afghanistan through informal money exchange dealers or means of transportation is much cheaper. At some point, Iran was exchanging a lot of dollars from Afghanistan to decrease intensity of economic sanctions.”
The Central Bank adopted a floating exchange regime and maintain value of Afghan Currency by supplying US dollars in the money market through auction among banks, money services providers and foreign exchange dealers. As per current international financial standards, the Central Bank itself is encouraging an informal and unwholesome economy. It can be a threshold to financial shortfalls and gradually financial problems accumulate.
The interviewees revealed that the operation of the Central Bank is underachieving. An interviewee said “the Central Bank supervisory role is figurative and should oversee precisely each single financial document.” In 2013 which was a difficult time for the Central Bank, a customs duty document was reused and approved a second time by a private bank and then the Central Bank for two different values. “This customs document was approved by a private bank for a single small package of Chinese batteries (AA Battery 24-Package) imported to Afghanistan via United Arab Emirates at a total cost of $11,804! This amount passed the audit of a private bank and then also cleared the audit of the Central Bank as well.”
The Kabul Bank was the first private bank established in June 2004 by a money broker, Sher Khan Farnood, the owner of Shaheen Exchange. Farnood, the president of the bank, and his four partners invested with a primary capital of $5 million in Kabul and later it expanded to 70 branches nationwide and provided banking services for 1.3 million customers. Due to reduction in liquidity and fraudulent loans around $900 million, the bank failed in 2010. Though various sources believe that Kabul Bank collapsed because of 2009 Afghanistan Presidential Elections. Farnood wrote in his Facebook Page “shareholders of the Kabul Bank manipulated management of the bank to fund their campaigns which led to collapse of the bank.” Khalilullah Ferozi, the CEO of the bank, was quoted in the first volume of the Comprehensive History of Afghanistan as “if the Kabul Bank won’t exist, neither Karzai nor the government will be there.” The 8am News concluded that “during the presidential elections 2009 for campaign team of President Karzai; the Kabul Bank paid huge amount of money, bullet proof vehicles, and other costs were funded in consultation with Omar Zakhilwal the minister of finance at that time and cashier of President Karzai’s campaign. Therefore, for a long-time the violations of banking regulation/law by Kabul Bank were ignored by high rank officials of the government of Afghanistan.” Finally, the information leaked to the mass media and was publicized after Farnood had informed the US Embassy in Kabul about widespread fraud and corruption within his bank. Immediately Farnood was barred from flying outside Afghanistan and put in custody since then. Under the management of the National Unity Government, the Kabul Bank case reopened in late 2014 and the Court punished the President and CEO of the Kabul Bank to 10 years imprisonment and a sum of more than $500 million to be paid. Findings of a study by Institute of Peace in 2016 show that the elite class involvement (those who benefit from this fraud) make a transparent investigation of the case impossible and it is emphasized “the beneficiaries include vice presidents, ministers, provincial governors, senior central bank regulators, and other powerful people. The political will necessary to seriously review the involvement of these individuals is unlikely to emerge, and even where the political will does exist, there is a lack of capacity to execute.”
The Central Bank survived from a fatalism after collapse of the Kabul Bank and very well managed to row to the shore. In 2011, an amount of $4.6 billion dollars was transferred-out and $800 million transferred-in via Kabul International Airport and the Central Bank immediately acted and put preventive measures against cash transportation. At the same year, American advisors were excluded to work for the Central Bank of Afghanistan. In 2012, the Financial Action Task Force (FATF) identified strategic deficiencies in the legal and regularity framework and added the Central Bank to its grey list. In 2013, the German Commerce Bank, a major dealing mediator and facilitator of banking transaction of Afghanistan closed-down all its internal accounts with Afghanistan after 11 years of continuous assistance. The reason behind this withdrawal was the lack of professional capacity of the Afghanistan’s banks, money laundry and pressure from American dealers who want all banking transactions to be cleared in the US. In 2014, the Central Bank was in the edge to be black listed by FATF. In 2014, an audit of the Central Bank conducted by Special Inspector General for Afghanistan Reconstruction (SIGAR) and did not make any recommendation by saying: “…SIGAR is not making any recommendations at this time. However, because of the fragile state of the banking sector and its importance to the overall stability of Afghanistan, SIGAR will continue to carefully monitor the situation.” In 2016, the USAID launched a five-year program, the Financial Access for Investing in the Development of Afghanistan (FAIDA), to develop banking capacity building, regulatory framework of lending institutions and borrowers. Finally, in 2017, the FATF announced that Afghanistan’s Central Bank has met all the requirements and it is no more in the grey list of FATF. A dramatic normalization of a chaotic situation could be the result of pain-taking days and nights efforts of the Central Bank and the international allies of Afghanistan. Most of the financial problems are beyond the scope of work of the Central Bank or has regional and or international origins which is unfair to expect the Central Bank solve them. Though, this young banking system despite of all its underperformances is willing to improve and standardize its operations and help facilitate businesses of national and international entrepreneurs. A robust entrepreneurship development is possible with high margin in a short-period of time and crucial for Afghanistan’s future.
In Principle, the government of Afghanistan and the Central Bank of Afghanistan encourage entrepreneurship and struggle to fulfill its national, regional and international commitments to reach self-sufficiency. The achievement of this goal is viable to make it more transparent by allowing the civil society to do its complementary role so as to observe, monitor and audit the financial sector. The banking sector can seek partnership with other banks possibly from the United States of America, the United Arab Emirates or Turkey for some time to gain know-how and expertise if the national laws allow and a key solution to economic development is feasible to put an end to impunity culture.
>>> READ ORIGINAL ARTICLE by Akbar Borran
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Akbar Borran is an MA in Economic Governance and Development from the OSCE-Academy and is an analyst and observer of the economic development of Afghanistan and the Central Asian and South Asian Region. He is a regular author for the Persian section of the Afghanistan Business News Portal.