Regulatory Requirements for Banks in Afghanistan Pose Significant Challenges
The banking sector in Afghanistan continues to face significant challenges, with limited access to reliable and transparent financial services hindering economic development.
Limited Access to Financial Services
- According to a recent report by the World Bank, only 10% of adults in Afghanistan have an account at any financial institution.
- This is compared to 70% in South Asia, highlighting the significant gap in access to financial services in Afghanistan.
Structural Vulnerabilities in the Banking System
The country’s banking system is plagued by structural vulnerabilities, including:
Liquidity Constraints and Withdrawal Limits
- These constraints have eroded public confidence in the sector.
- They have also made it difficult for banks to provide reliable and transparent financial services.
De-Risking by International Banks
De-risking by international banks has led to a significant reduction in international payments through banking channels. This has further exacerbated the challenges faced by the banking sector in Afghanistan.
Response to the Crisis
The Afghan government, international partners, and civil society organizations are working together to develop pragmatic policy and economic responses.
Regulatory Requirements for Banks
However, regulatory requirements for banks in Afghanistan continue to pose significant challenges. The country’s central bank, Da Afghanistan Bank (DAB), lacks expertise and capacity due to a brain drain that occurred after the Taliban took over in August 2021.
Challenges Faced by the Central Bank
- This has complicated financial regulation and supervision.
- It has made it difficult to address anti-money laundering and terrorist financing risks.
International Community’s Response
Despite efforts by the international community to provide humanitarian assistance through sanctions exceptions, Afghanistan remains perceived as a high-risk jurisdiction for international banks. This limits access to formal international payment channels.
World Bank Convenes Afghanistan Payments Conference
The World Bank has convened an inaugural Afghanistan Payments Conference in Dubai, bringing together over 100 stakeholders from domestic and international banks, digital service providers, and civil society organizations.
Key Takeaways from the Conference
- Participants highlighted issues faced by development partners.
- Future events will focus on the challenges of private sector businesses trying to conduct transactions through fractured payment channels.
- The conference emphasized that despite the deepening crisis, there are opportunities for innovation in financial services, including digital channels for financial inclusion and innovative payment systems.
Next Steps
The World Bank and Afghanistan Coordination Group (ACG) plan to convene stakeholders as part of a series of technical events to develop alternative modalities for development projects currently in design phase or under implementation.
Goal
The goal is to solicit ideas for pilots and innovations in payments that can be replicated and scaled up both for aid efforts and private sector activities.
Opportunities for Innovation
Strengthening the payment system and bolstering the private sector are key to reviving the economy and improving lives of Afghan people. An opportunity exists to work more closely with private financial services providers to reassess existing payment modalities and develop safer, sustainable, and lower-cost alternatives.