Asst. Prof. M. Sabir Sidiqee
(B.A, M.A. Economics. BHU),
As majority of Afghan are unbanked this article will throw light to the Financial Inclusion (FI) aspect of how to include vulnerable section of society in financial industry of Afghanistan as direct stakeholders. The concept of Financial Inclusion has remained a serious challenge to Afghan Economy especially to financial industry. This paper will help the newly established Financial Inclusion Department (FID) of Da Afghanistan Bank (DAB) in developing mechanisms and frameworks to improve financial inclusion in the country.
Keywords: Financial Inclusion, Financial Institutions, Financial Services, Banking Industry.
Before starting the discussion in this regard, it is very much important to highlight the definition, meaning and scope for such technical and scientific financial terminology.
According to Dr. K. C. Chakrabarty, Deputy Governor of the Reserve Bank of India, at the FICCI (Federation of Indian Chambers of Commerce & Industry) – UNDP (The United Nations Development Program) Seminar on “Financial Inclusion: Partnership between Banks, MFIs and Communities”, New Delhi, 14 October (2011), “Financial inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of society including vulnerable groups such as weaker section and low income group at an affordable cost in a transparent manner by the mainstream institutional players.
Financial Inclusion (FI) not only includes banking products but also the other financial services such as insurance and equity products. The household access to financial services includes access to unforeseen event financial planning, credit and wealth creation. Access to unforeseen event financial planning would help for future savings such as retirement savings, buffer savings and insurable contingencies and access to credit includes emergency loans, housing loans and consumption loans. On the other hand, access to wealth creation includes savings and investment based on household’s level of financial literacy and risk perception.
While talking about the Financial Inclusion in underdeveloped countries like Afghanistan, the first intuition that hits minds of many is having an account with a banking institution. But as far as scope of the Financial Inclusion (FI) is concerned, it covers at most the needs of population from financial institutions operating within the geographical space called a country from the A-Z financial services. According to World Bank Findex report 2014 only 09.96 percent of Afghan population between age group 15+ – 65+ is having an account with the operating banks in the country which is a disaster for financial and banking industry of Afghanistan in order to attract the local direct investment as well as foreign direct investment.
Figure 1: List of Financial Services
Figure source: Reserve Bank of India (RBI), 2011.
According to a World Bank Group (WBG) report two billion people — or 38% of adults in the world — do not use formal financial services, and 73% poor people are unbanked because of costs, travel distances and the often-burdensome requirements involved in opening a financial account. Their ranks include more than half of adults in the poorest 40% of households in developing countries.
Decades of war has affected the banking and financial industry of Afghanistan. To bring it to your notice in the late 2001, Afghan economy had only six licensed banks namely; Da Afghanistan Bank (DAB) a completely state owned-regulating financial institute, Bank Millie, Pashtany Tujarati Bank, Agriculture Development Bank, The Export Promotion Bank and The Industrial Development Bank. Soon after the establishment of new democratic model of governance and free market economy the investment opportunities in this vital sector has grown. New institutions in the banking and financial industry have emerged and have grown in a very much extensive nature and rate. There are currently three government banks, nine commercial banks and three foreign commercial banks engaged in banking operations in Afghanistan by offering different range of products and services with chain of 437 numbers of branches (ABA).
A small number of people in Afghanistan are using various banking instruments such as debit and credit cards, cheque books while involved in financial dealings. Most of the transactions are carried out using cash. There are only limited numbers of ATMs at five major cities of Afghanistan which are mostly situated indoor not outdoor due to high exposure to risk of theft and robbery.
Figure 2: Number of Branches of Different Banks in Afghanistan
Source: Afghanistan Banking Association, 2016.
IF we look closely into the banking and financial industry growth in Afghanistan after 2001, we will come across a scenario where most of the banks and their branches are situated within the five major cities namely; Kabul capital of the country, Mazar e Sharif, Herat, Nengarhar and Kandahar. This is because operating in Afghan market is obviously associated with higher rates of risk due to political instability and also financial illiteracy.
As mentioned earlier, according to World Bank Findex report 2014 only 09.96 percent of Afghan population between age group 15+ – 65+ is having an account with different types with banks currently operating in Afghanistan and that is only because they have some elementary knowledge about advantages of having an account in a particular bank and being engaged within financial industry of Afghanistan as direct or indirect stakeholder.
The availability of financial services and financial inclusion of vulnerable group of society in the rural as well as urban areas of Afghanistan is still very much low. The factors responsible for such a serious and critical condition can be looked at from both supply side and demand side and the major reason for low access to financial services is, probably, lack of supply. The reasons for low demand for financial services could be low income level, political instability, evil circle of poverty lack of trust on government and its strategic decisions, lack of financial literacy, other bank accounts in the family, interest (SOOD) and etc. On the other hand, the supply side factors include no bank branch in the vicinity, lack of suitable products meeting the needs of the poor people, complex processes and corruption. There are three dimensions need to be addressed in every policy development process to improve the “Financial Inclusion” in Afghanistan. This is highly recommended to the newly established Financial Inclusion Department of Da Afghanistan Bank to note the below points into serious consideration while developing framework papers.
- High Branch Availability (HBA)
Availability of a bank branch is measured as number of bank branches per one hundred thousand populations. This refers to the penetration of commercial bank branches and ATMs for the provision of maximum formal financial services to the rural and urban population.
- High Credit Availability (HCA)
Credit Availability takes the average of the three measures: number of loan accounts per one hundred thousand population, number of small borrower loan accounts per one hundred thousand populations and number of agriculture advances per one hundred thousand populations.
- High Deposit Availability (HDA)
Deposit Availability can be measured as the number of saving deposit accounts per one hundred thousand populations. With the help of this measure, the extent of the usage of formal credit system can be analyzed.
Financial Inclusion (FI) enables enhanced and sustainable economic and social development of the country. It helps in the empowerment of the underprivileged section of society like farmers, poor and women with the mission of making them self-sufficient and well informed to take better financial decisions. Financial inclusion takes into account the participation of vulnerable groups such as weaker sections of the society and low income groups, based on the extent of their access to financial services such as savings and payment account, credit insurance, pension, loans and etc. Also the objective of financial inclusion exercise is easy availability of financial services which allows maximum investment in business opportunities, education, saving for retirement, insurance against risks, etc. by the rural individuals and firms.
Recommendations to Improve Financial Inclusion (FI) in Afghanistan:
- Financial Inclusion Department of Da Afghanistan Bank shall start working on a comprehensive mechanism where availability of banking operation of currently operating banks in Afghanistan at country level with their products and services based on current demand should be given top most priority.
- Setting up a close coordination committee of Banks, Microfinance Institutions, Insurance Companies, Money Market Heads and Financial Industry Experts.
- Licensing specialized banks such as Agro banks, Industrial Banks, SME Bank and Women Bank.
- Developing technology based regulatory frameworks to control operations, product and service development based on current demand.
- Spread awareness of benefits of Financial Inclusion for households, firms and businesses.
- Financial Inclusion shall not longer be a policy choice but a policy compulsion
- Specialization of Financial Supervision Department of Da Afghanistan Bank as well as Financial Intelligence Unit of the same organization.