Having a bank account is still a new concept in Afghanistan as people prefer to keep their money at home, or they invest in gold. For a total population of 37 million, there are only 12 banks operating in Afghanistan, including three state banks, seven private banks and two branches of foreign banks. It’s been more than a decade since the development of the banking sectors in Afghanistan. There are still challenges and weaknesses, particularly lacking in areas such as professional expertise, a developed system, online banking, an internal control system and compliance.
Afghanistan is home to 37 million Afghans, with 99% of them Muslims and very strict with their religious practice. As per a World Bank report, only 10% of Afghans are banked. The involvement of interest in the mainstream finance system is one of the reasons behind the low participation of Afghans in the banking system. Likewise, since the collapse of Kabul Bank, Afghans have lost trust in the banking sector which has caused a further reduction of the banked population.
Despite all the challenges such as political and security instability, the banking industry achieved some milestones over the last decade: the first and only fully-fledged Islamic bank, Islamic Bank of Afghanistan received its license; Afghanistan launched its National Financial Inclusion Strategy; and the central bank’s gross international reserves surpassed US$9 billion.
Review of 2020
Like other parts of the world, Afghanistan’s banking industry suffered during 2020 due to the coronavirus pandemic. However, the situation is slightly different and tougher in Afghanistan compared with other countries. Since the start of the pandemic, while banking activities moved online in other parts of the world, online banking is still new in Afghanistan where a large number of customers do not have access to technology due to a lack of reliable electricity sources; a lack of fast and trusted internet connection; a limited number of ATM machines and points of sale around the country; and a lack of information, familiarity and trust with the online banking system.
Additionally, cyber fraud and customer information security are other challenges that banks are facing with an online system. Almost all transactions in Afghanistan are cash-based, so there is always a need for cash.
In a country where there are no money market instruments, lending is considered as the main source of income for banks. Nevertheless, this opportunity is also closely tied to the country’s situation which makes it much harder to develop investments. For instance, there are huge profitable investment opportunities in the agricultural sector but due to security issues, banks are reluctant to take the risk. On top of that, due to a shortage of skilled staff in the Islamic banking industry, the central bank is trying its best to conduct different levels of training.
Despite all the challenges, Da Afghanistan Bank (DAB), the central bank, and other related officials remain committed to their goals and have performed well. Upon a trilateral MoU being signed between the DAB, Afghan Post and the Afghanistan Banking Association, for the first time in the country’s history, Afghans have access to banking services via the branches of Afghan Post. This is a big step toward the financial inclusion of Afghans and an immediate solution to provide loans throughout the country.
The World Bank’s board of executive directors has approved a US$400 million grant to help Afghanistan to “sustain the pace of key economic and public finance reform and support the country to manage current risks and uncertainties compounded by the COVID-19 crisis”. This may provide some relief but much needs to be taken care of due to the outbreak of COVID-19, as consumption, exports and remittances have been hard-hit not to mention an ongoing conflict.
Preview of 2021
2021 is unpredictable, and depends on the pandemic situation and the “agreement for bringing peace to Afghanistan” that has been signed between the US and the Taliban. It also depends on how the peace talks between the Taliban and the Afghanistan government take place. There will be a substantial impact on Afghanistan’s economy from the COVID-19 crisis as it takes years to recover with further limitations from the political and security uncertainties.
Despite the challenges, the banking industry in Afghanistan stays positive for 2021 and more achievements are to be expected. The trilateral MoU will pave the way for many Afghans to be involved in the banking system and more investments to be made. We are looking forward to the peace agreement and hope it puts an end to the decades of war and uncertanities in the country.