Banking Industry Faces Uncertain Future in Afghanistan
Kabul, Afghanistan - The banking industry in Afghanistan is facing a precarious future due to various impediments, including a lack of well-developed public infrastructure, which hampers the sector’s ability to provide essential services.
Challenges Facing the Banking Sector
Despite the challenges, banks will continue to operate at a limited capacity, but their primary function will shift from lending to providing alternative services such as:
- International payments
- Government tax and customs collection
- Payroll management
- Issuance of non-fund-based facilities
However, these changes are likely to make banking services less affordable and attractive to the general public, exacerbating the country’s low financial penetration rate.
Struggling Private Banks and Loss of Public Trust
The two private banks in Afghanistan are still struggling to honor their commitments, leading to a decline in deposits and a loss of public trust in the industry. The sector has faced significant challenges in recent years, with five banks collapsing or facing serious trouble, including the liquidation of three banks.
Taliban’s Islamic Banking Mandate Adds Complexity
The Taliban government’s directive for all commercial banks to convert to fully Islamic banking within three years has added an extra layer of complexity to the sector. Banks will need to:
- Acquire new management information systems
- Recruit or train staff in Islamic banking
- Update policies and procedures
While this transition may be challenging, experts believe that the central bank’s experience in converting a conventional bank into an Islamic bank will help other banks navigate the process more smoothly.
Afghan Fund Offers Limited Relief
The Afghan Fund, established in 2022 with assets transferred from the DAB, has not yet found a way to contribute significantly to economic development in Afghanistan. However, it can provide some relief to the banking sector by:
- Helping to stabilize deposits
- Providing liquidity support
Conclusion
In conclusion, the banking industry in Afghanistan faces significant challenges that will require careful management and strategic planning to overcome. While there are reasons for optimism, including the experience gained from converting a conventional bank into an Islamic bank, the sector’s future remains uncertain.