Sunday, March 3, 2024

Redefining and Redesigning Afghanistan’s Banking and Financial Sectors

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Khaama Press
Khaama Press
Khaama Press is the leading news agency of Afghanistan with over 3 million hits a month.

DISCLAIMER – The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of The Khaama Press News Agency. We welcome opinions and submissions to Khaama Press Opinions– Please email them to

A bank is a financial institution that collects financial resources from depositors, safeguards them and loans them back to consumers and business owners, brokers, investors, and even sovereign actors at an interest. In essence, a bank is a bridge between an individual who does not have the capital to a person that does. Speaking metaphorically, a bank is like a water dam. The slow stream of water pours into the dam – gradually causing accumulation of water. Massive amounts of water in a dam are key in generating electricity and a better irrigation system.

Similarly, banks are institutions that accumulate financial resources and direct them toward investment opportunities for growth and regeneration of wealth. There are many various types of banks. A Central Bank usually acts as a mother bank, regulates the banking system, controls inflation, provides loans to investment institutions, commercial, retail banks and ensures healthy liquidity levels in a financial market of a given sovereign state.

Financial resources are limited; therefore, a bank plays a fundamental role in collecting financial resources and loaning them back. This process is key in the generation and production of liquidity in markets.

Afghanistan’s mother bank – “Da Afghanistan Bank” (DAB) – was established almost 80 years ago and it has two main objectives. 1) to foster price stability and 2) to build a robust financial system in Afghanistan.  The question is to what extent DAB has been capable of achieving these two objectives?

Afghanistan’s economy is highly influenced by the value of the United States Dollar (USD). Over the last 10 years, almost 80-90 percent of Afghani (Afghanistan’s currency) value has been lost against the USD. Moreover, DAB has failed to drive the Afghan economy toward robustness. Of course, it is very easy to blame terrorism, the Taliban, and war as the key drivers of economic failure, but on the ground, realities tell a different story. In fact, based on what we see, DAB lacks serious practical banking knowledge on how the financial markets work. Moreover, political dependency has further undermined the DAB’s ability to act flexibly and work harder to achieve its objectives. My attempt here is not to criticize but to point out DAB’s serious shortcomings and highlight the financial system’s inherent problems. By writing this piece, we can begin a discourse on how we can redefine, rebuild, and redesign Afghanistan’s banking and financial industries.

Central Banks all around the world apply ‘sovereign bonds’ as well as ‘interest rates as key tools in driving liquidity and managing inflation and deflation rates; however, this is not the case in Afghanistan. It means DAB does not have any tools to apply for measuring and contributing to the liquidity of the market. The foreign currency injection specifically of the USD and EURO (EUR) are the only tools in buying back Afghani. The true value of the USD and EUR derive from their respective sovereigns’ international trade, inflation, quantitative easing policies, employment data, and interest rates. Moreover, geopolitical issues are among the other reasons behind the valuation of the USD and EUR.  The injection of the USD and EUR in the Afghan markets is contributing to short-term Afghani deflation, but in the long run, they have made Afghani highly dependent in relation to the value of the USD and EUR. Therefore, the injection of foreign currencies has been counterproductive and unhealthy for Afghanistan’s financial markets.

DAB must create Afghanistan’s ‘sovereign bond’ system where market intervention should only be done through a bond, and not foreign currencies. I understand that this is not an easy challenge to tackle. There are serious financial, political, and cultural implications for establishing the bond market, but I believe it is the only way.

In the last 15 years, a handful of private retails banks has been established in Afghanistan in addition to the state-owned banks. Unfortunately, these retail banks that provide services to the general public rather than companies and corporations are mainly focused on opening accounts and daily transactions but offer no loan program to individuals, families, or entrepreneurs, and businesses. Most importantly, there is no investment banking wing within these institutions to take care of their excess capital. Consequently, they are just partially effective. The market has not benefitted from their huge cash amounts, which are either stashed away in Afghanistan or in foreign banks. The cash is out of the healthy market circulation and has become a liability.

The International Monetary Fund (IMF) and the presence of major international economies in Afghanistan have largely failed to build a viable and practical system of financing and loans to consumers and businesses. We often talk about the failure of the Kabul Bank, but Afghanistan must move forward and learn from its past financial failures.

The Afghan economy must be linked to global markets, but this connectivity is lacking a trust-building mechanism. Afghanistan’s Ministry of Finance, DAB, and Afghan diplomatic missions abroad are key to building trust and linking the Afghan economy to global markets.   

Investment banking and financial brokerage services are other keys and fundamental areas that need serious attention. The Parliament of Afghanistan should legislate relevant laws for investment banking and brokerage services. Afghanistan has an institution called “Afghan Deposit Insurance Corporation” (ADIC), which is part of DAB but the degree of cooperation between the two entities is unclear, particularly when it comes to insurance for retail, investment, and commercial banks.

The Afghan government should work to facilitate and pave the way for investment banking, primary and secondary markets, where businesses could access credit for expansion as well as individuals and families to invest their excess capital for the growth of their retirement plans.

Afghanistan is a cash-rich country but possesses a financially poor and dilapidated system. There is very limited opportunity for consumers and businesses to borrow money based on their credit history. There is no system in Afghanistan for the evaluation of consumers and small businesses’ credit history. An independent credit rating entity must be established.  

Almost all transactions in Afghanistan are cash-driven. In progressive economies, there is a stable credit system, where people buy whatever they like including property and cars. A sound credit system facilitates the consumption market and consistency in the circulation of the market. I am advocating for a consumption credit system as well as supporting the programs that facilitate small and medium-size loans to businesses.

It’s not governments that create employment in an open economic system but the private sector and businesses.

The government is responsible for securing credit lines in various packages for business owners, as well as securing insurance. A practical job market requires a stable credit system. The Afghan government and Parliament should start working on developing a series of investment laws, regulations, and institutions to ensure a practical and accessible credit system, primary and secondary markets, as well as a very active bond market.

Moreover, business owners and entrepreneurs should be encouraged to take risk so that a culture of risk-taking in the country is developed. Without taking some risks, no major projects can ever materialize in a country. Trial and error is the only practical strategy that will likely move Afghanistan’s financial market towards anti-fragility and create an environment that is conducive to a panic resistant banking system. Afghanistan can become a prosperous country only if it is willing to redefine, rebuild, and redesign its financial and banking sectors.

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