Afghanistan’s Banking Sector Expands, But Lacks Adequate Regulation

Despite significant growth in recent years, Afghanistan’s banking sector remains plagued by regulatory shortcomings. The country’s financial landscape has undergone changes with the establishment of correspondent banking relationships and government support for microfinance initiatives like the Microfinance Investment Facility for Afghanistan (MISFA). However, most financial transactions still occur through money service providers (MSPs), also known as hawaladars, due to limited bank presence in rural areas.

Regulatory Challenges

• Anti-money laundering and combating the financing of terrorism (AML/CFT) measures are in place but need significant strengthening.
• The country’s AML/CFT regulations lack essential requirements, such as determining whether customers are acting on behalf of others or understanding ownership and control structures.

Correspondent Banking Relationships

• No requirements to gather information about respondent institutions beyond basic customer due diligence.
• Wire transfer rules are unclear, particularly for domestic transfers.
• Threshold for verifying originator information is higher than international standards.

Financial Institutions’ Responsibilities

• Financial institutions are required to report suspicious transactions but few have done so in practice.
• The scope of reporting requirements is too narrow and only covers activities related to money laundering and terrorist financing, neglecting other criminal activities.

Internal Policies and Procedures

• Lack of guidance on internal policies and procedures for preventing money laundering leads to varying levels of depth and coverage among institutions.
• Market entry conditions and AML/CFT supervision fall short of international standards due to insufficient resources, expertise, and anti-corruption measures in place.

Supervision and Regulation

• The central bank, the Da Afghanistan Bank (DAB), is responsible for supervising banks, microfinance institutions, and MSPs but lacks sufficient resources and expertise to effectively implement regulations.
• Market entry conditions are inadequate with no measures in place to ensure the fit and properness of beneficial owners or conduct criminal background checks.

Challenges and Risks

• Many MSPs continue to operate outside the legal framework, particularly in provinces like Kandahar, Helmand, and Herat.
• The lack of adequate regulation and supervision creates significant risks for the financial sector and the broader economy.

Conclusion

While Afghanistan’s banking sector has expanded, it remains vulnerable due to regulatory weaknesses and insufficient resources. Addressing these shortcomings is crucial to ensuring the stability and integrity of the financial system.