With a 99 per cent Muslim population and a series of scandals which ebbed away confidence in its conventional banking sector, one would think that Afghanistan is a prime candidate for Islamic finance. At least, that’s what its Government is banking on. Last month, Da Afghanistan Bank – Afghanistan’s Central Bank – announced that it expects a new Islamic banking law to be enacted by September this year.
We don’t have to look very far for a motive. Thirty years of war and insurgency has reduced Afghanistan to a strong reliance on foreign aid; the country has received more than $32 billion in international aid since US-led forces toppled the Taliban in 2001. The Government wants to expand Islamic finance to draw more assets into the financial system, help reduce the nation’s reliance on overseas aid and rebuild the country’s brittle economy.
The move would also draw billions in deposits from citizens wary of the conventional banking system. Afghans often prefer cash transactions to interest-based banking, which has stunted the growth of local businesses. An Islamic banking law could breathe hope into an industry darkened by scandal in recent months. The Central Bank took over Kabulbank, the country’s largest private bank, in September after irregularities of about $579 million raised red flags with authorities, further eroding the public’s trust in the conventional banking sector. Continue reading