Afghanistan’s Financial Sector: A Mixed Bag of Progress and Challenges

Despite its small size, Afghanistan’s financial system has made significant strides in recent years. Correspondent banking relationships have been established with institutions from several countries, and the government has supported microfinance growth through initiatives such as the Microfinance Investment Facility for Afghanistan (MISFA).

Challenges in the Financial Sector

However, numerous challenges still plague the sector.

• Money service providers (MSPs), also known as hawaladars, continue to play a crucial role in facilitating transactions despite security concerns and limited banking infrastructure in rural areas.
• Anti-money laundering and combating the financing of terrorism (AML/CFT) measures require improvement.

AML/CFT Measures

Afghanistan’s financial institutions are required to implement basic customer due diligence and record-keeping measures. However, these requirements fall short of international standards in several key areas:

• There is no requirement for institutions to determine whether customers are acting on behalf of others or perform enhanced due diligence on high-risk customers or transactions.
• There is a lack of requirements for verifying the authorization of natural persons or conducting ongoing due diligence on business relationships.
• Correspondent banking relationships require improvement, with no requirements to gather information on respondent institutions beyond basic customer due diligence.

Financial Institutions and Reporting

Financial institutions are required to report suspicious transactions to FinTRACA, but few have done so in practice. The scope of this requirement is also too narrow, as not all activities listed under international standards have been criminalized in Afghanistan.

Internal Policies and Procedures

Internal policies and procedures for preventing money laundering are lacking, with no guidance provided on what should be covered. Market entry conditions and AML/CFT supervision fall short of international standards, with a general lack of resources and expertise contributing to the existing framework’s ineffectiveness.

Supervision and Regulation

The central bank, Da Afghanistan Bank (DAB), is responsible for supervising banks, including depository microfinance institutions, MSPs, and foreign exchange dealers. However:

• Market entry conditions are insufficient, with no measures in place to ensure the fit and properness of beneficial owners or conduct criminal background checks.
• A large number of MSPs continue to operate outside the legal framework, particularly in provinces such as Kandahar, Helmand, and Herat.

Conclusion

While there have been some positive developments in Afghanistan’s financial sector, significant challenges remain. Addressing these issues will be crucial for maintaining stability and preventing the misuse of the financial system.