Editor in Chief: Moh. Reza Huwaida Monday, December 9th, 2019

The challenges and opportunities of banking industry in Afghanistan

After the 9/11 event and the formation of interim government, some important steps were taken for establishment of a good economic and political system in Afghanistan. For example it was almost for the first time that Afghanistan accepted some modern values such as power transition through election system, freedom of media, social equality and so on.  In terms of economy, significant changes happened in the Afghan banking and money system. With accepting the free market system and the principle of competition among all businesses, the Afghan economy strived to expand, the business environment thrived to generate more employment and more importantly dozens of private banks emerged in the country.
In recent years, modern banking system has made dramatic improvement as at least seven types of debit cards are used in bank deposits and transactions in the country. More than 15 percent of Afghans have access to banking services, of which eight percent have full acquaintance with electronic banking system. Meanwhile, a number of residents stress the need for expansion of banking services throughout the country. They call on government to increase banking services in remote areas of Afghanistan. In past years, salary payment was a hard task in the country but now most salaries are paid through banking system even in the most remote areas.
Now, there are about 16 or 17 banks which include 3 state banks, 10 private banks and several branches of foreign banks. They provide financing to various sectors of the economy to uplift the economic situation of the country through real sectors of the economy. The contribution of the banking sector in economic growth of both developing and developed countries is very important. The research shows that stock market and bank financing engender positive impact on economic growth and development in the surveyed countries. Overall, Afghanistan witnessed strong economic growth and development in banking system comparing to two decades before. Growth in the financial sector, specifically within the banking sector was considerable in quantity. Thus, national income increased manifold, especially in the first decade of new era. For example, most of the macroeconomic indicators, including exchange rate, inflation, balance of payments, government revenues, investment, international trade, industrial production, and employment level promoted in the country.
Despite these achievements, there are some challenges and weakness in many areas of banking system including personnel capacity, internal controls, accounting, credit analysis, corruption and compliance with regulations. Unfortunately, some bank loans and credits have a political and non-economic uses in Afghanistan. One of the main reasons for domestic bank crisis rooted in the political loans and lack of financial security. Thus, the four decades of persisting conflicts and Kabul bank crisis have caused people to lose their credence on banking system, especially electronic banking which is a new phenomenon in the country.   If such environment continues it will not have good consequences for domestic productions. Therefore, the Afghan banking industry should restore its credibility because the real capital of banks is not money it is public trust.
In addition to revival of the people’s trust, the banks should increase their investment in the country so that banking culture is further promoted. Thus, the Afghan banking system cannot respond to demand of the time, especially if we compare to the developed or developing countries of the world. Given the diversity of specialized businesses and intensifying economic completion, the Afghan banking industries need to be specialized in order to successfully respond to the current demand of market. The specialized banking can be implemented in two different ways: the first way is that commercial bank opens specialized branches to work in specific areas such as housing, business and so on. The second way is establishment of new banks to work in specific fields such as agriculture, housing or trade.
Other changes need to be occurred is provision of variety of banking facilities and services. Money creation is the most important strength of the banking system while it is increased through expansion of credit facilities and loans. Therefore, diversification of banking facilities will expand productions and businesses through enabling people to obtain loans and repay to the bank. This kind of money circulation will not only benefit the people but also the banks as it creates more money and the created money will be transferred back to the banks. In the other words, the more money circulates in a country, the more economic productivities will happen.
Given the fact that banking and bank industry is becoming an inevitable part of individual and social lives, the requirement of today’s financial market and the economic interaction of the modern world necessitate the need to move from traditional financial markets to complex and complementary financial markets. In the new money system and financial markets, the new financial needs of companies and businesses are not fulfilled without credible banking system. Responding to these needs are only feasible if new financial markets and banking systems are developed. Expanding these markets will lead to greater entrepreneurship and creativity of the people in producing better products, increasing the level of community production and boosting the market, and ultimately more money circulation.
Money like other commodity follows the principle of supply and demand. The price of money depends on the bank’s interest rate. In the absence of the financial market, real interest rates cannot be determined.
Dynamic banking system plays a vital role in economic development. Thus, it must be emphasized that the fledgling economy of Afghanistan needs to transform the financial system for its rapid development. A dynamic and active private financial system considered as a complementary to the public financial system. The existence of opportunities in the financial and banking sectors of our country will encourage the private sector and economic movement, provided that it’s primary platforms are provided as earlier mentioned.