Afghanistan’s Banking Sector: A Mixed Bag of Progress and Challenges
Kabul, Afghanistan - Despite facing numerous challenges, including weak management and banking law violations, three state-owned banks in Afghanistan have managed to operate at a profit.
State-Owned Banks
The Export Promotion Bank (EPB), Banke Millie Afghan (BMA) and Pashtany Tejaraty Bank (PTB) were relicensed initially with 25 percent ownership held by the Asian Development Bank. However, the other three state-owned banks were not relicensed due to their failure to meet minimum capital requirements.
Progress in Afghanistan’s Financial System
According to a recent report by the International Monetary Fund (IMF), Afghanistan’s financial system has made significant progress since 2004. As of March 2008, the country had:
- 15 licensed commercial banks
- 183 branches in 20 provinces
- 332 foreign exchange dealers
- 100 licensed money service providers
The Hawala System
The Hawala system, a traditional method of transferring funds, remains popular among Afghans due to its perceived speed, low cost, and convenience. However, the development of commercial banking is crucial for the country’s economic growth.
Growth of Local Private Sector Banks
A recent study by Da Afghanistan Bank found that local private sector banks have been growing rapidly, with their share of total deposits increasing from:
- 60 million USD in 2004 to
- 1.278 billion USD in 2008
Foreign-owned banks also saw an increase in assets and deposits during this period.
Challenges Facing Commercial Banks
The report highlights the challenges faced by commercial banks in Afghanistan, including:
- Corruption
- Inefficiency in the court system
- Inadequate laws and regulations
Despite these hurdles, some banks have managed to thrive, with two domestic private banks accounting for almost 50 percent of total banking sector assets.
Lending Behavior
A qualitative study based on interviews with senior bank officials found that lending behavior differs significantly among commercial banks in Afghanistan. While internationally- reputable foreign-owned banks have negligible lending activities, domestically-owned banks have large loan portfolios and extensive credit activity.
Relationship between CAMEL Ratings and Domestic Lending
The study also examined the relationship between commercial banks’ composite CAMEL ratings and their involvement in domestic lending. The results showed that:
- Banks with higher CAMEL ratings tend to be more involved in domestic lending
Conclusion
Overall, while Afghanistan’s banking sector faces significant challenges, it has made progress since 2004. The government and international organizations must continue to support the development of commercial banking in the country to promote economic growth and stability.