188. After more than two decades of war and conflict, regional tensions, and endemic security concerns, very little was left of Afghanistan’s financial system when the Taliban departed at the end of 2001. Although six commercial banks still retained banking licenses, none of them was operational. Virtually no loans had been made since 1995 and banks had lost their credibility as deposit-taking institutions. The central bank had been changed into a Soviet-style dirigiste institution, interfering in the allocation of credit and the setting of interest rates, and abrogating its responsibility to undertake the traditional functions of a central bank. Its financial role was subsumed to monetizing successive governments’ fiscal deficits. The banking system could no longer provide a payment system, which was instead taken over by the informal Hawala system.
189. The speed with which Afghanistan’s economy can be rebuilt and sustainable economic growth achieved, and ultimately widespread poverty reduced will depend crucially on a rapid and sound redevelopment of its financial sector.94 For the government to pay the wages of its civil servants, procure goods and services, and undertake investment in infrastructure, for it to collect taxes and customs duties efficiently, and for Afghanistan to make the best use of the substantial donor funds destined for its reconstruction, a rudimentary payment system and basic financial services are essential. It is thus paramount for the Afghani authorities to quickly initiate reforms to move away from cash as the sole medium of exchange and to lay down the enabling framework for an efficient commercial banking system to flourish. And for all this to be done while safeguarding against fraud and bank failure, it will be necessary to rebuild a modern central bank, with a supervisory capacity in line with international standards to oversee the operations of the new banking system as it develops.95
Asian Development Bank, 2003, National Payments System for the Islamic Republic of Afghanistan, (draft (B) issued August 19), Final Report TA 3874-AFG, prepared by Schlumberger Sema.
Bokros, Lajos, 2001, “Banking Sector Reform in Central and Eastern Europe,” in A Decade of Transition: Achievements and Challenges, ed. by Havrylyshyn Oleh and Seleh M. Nsouli (Washington: International Monetary Fund).
El Qorchi, Mohammed, Samuel Munzele Maimbo, John F. Wilson, 2003, Informal Funds Transfer: An Analysis of the Hawala System, IMF Occasional Paper No. 222 (Washington: International Monetary Fund).
Holden, Paul, and Vassili Prokopenko, 2001, “Financial Development and Poverty alleviation: Issues and Policy Implications for Developing and Transition Countries,” IMF Working Paper 01/160 (Washington: International Monetary Fund).
Islamic State of Afghanistan, 1994, The Law on Money and Banking of the Islamic State of Afghanistan (unofficial and unpublished translation from Dari into English).
Levine, Ross, Norman Loayza, and Thorsten Beck, 2000, “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics, Vol. 46 (August), pp. 31–77.
Maimbo, Samuel Munzele, 2003, “The Money Exchange Dealers of Kabul—A Study of the Hawala System in Afghanistan,” World Bank Working Paper No. 13 (Washington: World Bank)
Prepared by Felix Fischer.
See Holden and Prokopenko (2001) for a literature review on the linkages between the financial sector growth, economic growth, and poverty. See also Levin et al. (2000) for an econometric analysis showing the positive link between financial intermediation and growth. The study also confirms that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate growth.
Banking supervision does not necessarily have to be performed by a central bank. Some countries have chosen to set up a separate institution for this purpose.
However, a detailed assessment of the old legal framework would be necessary to determine the adequacy and mutual consistency of the laws. Given the variety of origins the legal framework has been built on it is not unlikely that at least parts of the laws could be contradictory or incompatible.
Based on the very rudimentary information available, the property law and the law of obligations could in principle be adequate for supporting banking transactions in Afghanistan. Again, a more thorough review of the laws would be necessary to determine its adequacy for banking activities.
In DAB’s headquarters there were only 5,000 active accounts out of a total of 100,000 accounts (35,000 of which had a zero balance). In the first 30 branches assessed in May 2002, less than 6,000 accounts were found to be active. Active accounts are defined as those that had any movements since the beginning of the year or that had a customer who declared an interest for his or her account.
Conventional central banks have both financial and management accounting. With financial accounting, central banks produce financial statements that reflect the “true and fair value” of their accounts, as well as the profitability of their operations. It further allows for financial control, cost accounting, and information to be made public. Under the management accounting, internal forward-looking financial statements are produced, based on which management derives its information, monitors the financial health of the organization, and, most importantly, takes strategic decisions, including budgeting and planning.
In early 2002, a major and constant problem for the connectivity of the main office with the branches or with DAB’s customers was the lack of communication. Urgent messages from the main office to the branches outside the city were sent via telegram to the provinces of Mazar-i-Sharif, Farab, Jowzjan, Farah, and Kandahar. DAB itself had one direct telephone line, a set of analogue phones for telephone calls within Kabul only, and eleven digital lines, which allow calls within Kabul and to the regional centers in Herat, Mazar-i-Sharif and Kandahar. The situation was even worse with respect to computer hardware and software. DAB had only three older model computers in its main office, but none in the entire branch network. Data processing in DAB has so far been manual and old-fashioned typewriters were virtually the only equipment in use.
The Cartotek accounting system is a double-entry manual bookkeeping system, in which entries are booked separately for stocks (balance sheet) and flows (profit and loss statement). The data are then transposed into line items in the balance sheet and profit and loss statement.
A commonly applied accounting rule in many developed countries prescribes that loans which are nonperforming for a year would be written down in the balance sheet to a value of zero. At the same time, a charge in the income statement of the same amount would be imputed under “provisioning,” thereby reducing the profit of that year by the amount of the nonperforming loan. However, the client’s liability would still remain vis-à-vis the bank, which would enforce the loan contract if necessary through the court system.
Afghanistan remains the largest opium producer in the world. See Chapter II (Annex for an account of opium production in Afghanistan.
The draft law also provides DAB with the powers to specify by regulation additional activities for banks to the extent not specifically restricted by law.
In early 2002, DAB has also resumed the payment of interest on the savings accounts.
As the volume of transactions increases, it is planned that the Immarsat connections would be replaced by a VSAT network.
Facilitating the Ministry of Rural Development’s scheme to make grant payments to 7,000 villages commencing end-September 2003 using the DAB branch network outside Kabul represents one of DAB’s biggest immediate tasks. As regards the MoF individual salary payment requirements, this is still in the planning stage by a taskforce at the ministry. Retail salary payments in Afghanistan are currently made by cash payments at the employees’ place of work in the municipalities, rather than by bank transfer to commercial banks (which is not possible) or through individual payments at DAB’s branches around the country. However, the number of DAB branches required to undertake this operation is limited by the fact that, after the money has been sent to the local DAB branch, provincial payments are thereafter the responsibility of the local representative of the MoF (Moustoufi).
The disadvantage of self-regulation is that it risks becoming self-serving with a high degree of regulatory forbearance.