Islamic finance could help rebuild Afghanistan

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.


Bank-e-Millie Afghan believes that Islamic finance can coax Afghanistan’s unbanked population into taking their funds from under their mattresses and placing them back into the economy. Bank-e-Millie Afghan was the first bank in the history of Afghanistan, preceding even the Central Bank. Established in 1933, Bank-e-Millie Afghan introduced the banking system in Afghanistan. The bank has now set its sights on becoming a leading institution for Islamic finance in Afghanistan.


What is the potential for Islamic banking in Afghanistan?
There is quite good potential for Islamic banking in Afghanistan. Most of the people who can access banking services don’t use them just because of the interest. The demand for Islamic bank services is very high in banked and unbanked populations of Afghanistan. Bankers estimate that there is close to $30 billion in circulation that remains untapped by the banking sector.


What we need to do, not just what the Government needs to do, but also the private sector and the people of Afghanistan, is campaign an awareness programmes for Islamic banking. People need to get familiar with the products and procedures. The Government, the Central Bank and also the banks need to provide education programmes so that people can get comfortable with the idea of their funds being invested in a Shari’ah-compliant way.


Afghanistan struggles with record levels of military and civilian casualties as well as corruption concerns, and Islamic banking could renew trust in the sector. The crisis showed Islamic banking provides more transparency. Islamic banking can show people that their money is safe and secure in tangible projects that are being developed.


Bank-e-Millie’s Islamic banking business has $15 million in deposits and that is projected to rise to $50 million by the end of the year as demand grows. The Islamic banking sector in Afghanistan could attract up to $6 billion in five years, if the sector starts to offer products such as Islamic credit cards, debit cards and automated teller machine facilities.


Why did you decide it was the right time to launch Islamic products?
Islamic banking has been recently started. It’s an Islamic country but Islamic banking was never practiced. Even conventional banking is new to Afghanistan. Before this Government, during the Taliban and before that, the banking sector was controlled by the Government. The private sector was not permitted to invest in the banking sector. After the fall of the Taliban, with the coming of the new regime, the private sector was allowed to invest in the banking sector. The Government who were running the few banks liquidated all banks but two, one of which is our bank. These banks still have influence over the market. Government control over the banking sector hindered Islamic banking in Afghanistan.


However, there are now six banks operating Islamic windows. We recently launched Islamic banking and we’ve had a good response. We have introduced a few products: Ijarah-based; Murabaha-based and we are working on some other products. We are very optimistic that we will be launching new products soon.


When I joined the bank two years back, the bank had a few problems and I had to tackle those. I had to develop certain policies and procedures and implement certain software to give basic facilities to the customers. When I had finished with those aspects of the conventional bank, I held discussions with businessmen of Afghanistan. A concern I was getting from the public was that they wanted to invest their money in accordance with their faith and beliefs. I just saw it as part of the market, so I decided to launch Islamic banking, and it got a good response.


What challenges did you encounter?
Convincing the public that the procedures were truly Shari’ah-compliant; you have to satisfy every individual and explain the entire procedure of the product. The other was systems and software, and the availability of those systems in Afghanistan. Bringing scholars to Afghanistan was another issue, because of the security. We are optimistic that gradually things will change, that the security will get better and we will be able to train our employees.


In regard to risk management in Islamic banks, again we have a problem. We have problems finding experts in the field, and also in accounting. All these are challenges but we are trying to resolve them, and are optimistic that we will.


What has reaction been like to the products you’ve launched?
We are still facing capacity problems and people aren’t very familiar with Islamic banks, so we are doing our best to promote awareness and educate people on Islamic banking. Meanwhile we are training our own personnel, so that they can get familiar with the products, services, and markets in Islamic banking, not only in the region but worldwide.


And so we are moving forward gradually, and I am optimistic that our Islamic banking will lead the region.


What are your initiatives in Islamic banking for 2011?
We are planning to launch more Shari’ah-compliant products. We are in the initial stages for finding a market for Takaful and Islamic mortgages. Our ultimate goal is to shake out all the money that is lying in pillows and not with the economy in order to contribute to the rebuilding of Afghanistan.


You must have seen so much change during your career…
I remember when I started with the Central Bank. At that time we did not have a single private bank in Afghanistan. Now we have seventeen banks operating in Afghanistan. At that time, entire deposits did not exceed $15 million; now we have exceeded $2 billion. The loan portfolio of the entire banking sector was not exceeding $30 million. Now it is exceeding $1 billion. In terms of employees, there were around 400 employees in the entire banking sector, now only one bank has 4000. You cannot imagine the changes that have taken place in the banking sector of Afghanistan.


Islamic finance depends on the support and the security situation. With the support of the Government and improveed security, I am sure we will lead other countries in Islamic banking, particularly our neighbouring countries. Islamic finance in Afghanistan will happen because of its people’s beliefs and trust in Islamic banking. Meanwhile, conventional banking is not so high that Islamic banking cannot reach it. Conventional banking is new itself in Afghanistan, so they are almost parallel with each other. Islamic banking can fill a vacuum. I do see a good future for Islamic banking and finance in Afghanistan.


Key facts about Afghanistan
Even though the country is barely 300-years-old, it has been playing a key role in the region for over two millennia.


  • Since the late 1970s, Afghanistan has experienced a continuous state of war, including major occupations in the forms of the 1979 Soviet invasion, a Pakistani military intervention in support of the Taliban in the late 1990s and the October 2001 US-led invasion that overthrew the Taliban Government.
  • Afghanistan’s economy is slowly recovering from the decades of conflict. The economy has improved significantly since the fall of the Taliban regime largely thanks to the infusion of international assistance, the recovery of the agricultural sector, and service sector growth.
  • Agricultural production is the backbone of the nation’s economy, accounting for 75 per cent of its citizens’ jobs.
  • Afghanistan’s economy has grown approximately 12 per cent per year during the past six years; however it remains one of the world’s poorest countries. Its unemployment rate is 35 per cent and roughly 36 per cent of its citizens endure life below the poverty line. Roughly 42 per cent of the population live on less than $1 a day.
  • Afghanistan received less than a third of the aid per head ploughed into the reconstruction efforts in Bosnia, East Timor or Rwanda, and of that less than half went on long-term development programmes.
  • According to Transparency International’s Corruption Perceptions Index, Afghanistan is the world’s second-most corrupt country, beaten only by lawless Somalia.
  • Afghanistan has an estimated population of 29.8 million, 99 per cent of which is Muslim.
  • Out of Afghanistan’s 17 banks, six have Islamic windows. The Central Bank hopes to approve the creation of fully-fledged Islamic banks after the Islamic banking law is passed; it has been reported that it plans to issue licences to three Islamic banks. It has also been reported that a government sale of SukukKhan Afzal Hadawal
    Khan Afzal Hadawal is the CEO and President of Bank-e-Millie Afghan. Previously, Hadawal served as Acting Governor for Afghanistan’s Central Bank, Da Afghanistan Bank. He also worked as an Advisor to the Governor & Secretary General for the Supreme Council of Da Afghanistan Bank. Hadawal played a key role in the establishment of the Financial Intelligence Unit in Afghanistan and in developing the legal framework for the banking sector in Afghanistan.

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