Editor in Chief: Moh. Reza Huwaida Wednesday, June 20th, 2018

Practical Aspects of Islamic Banking in Afghanistan

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Practical Aspects of Islamic  Banking in Afghanistan
Exclusive for the Daily Outlook Afghanistan

Islamic banking was introduced in Af ghanistan between 2008 and 2009. The first draft banking law was prepared by Da Afghanistan Bank (Central Bank of Afghanistan) Da Afghanistan Bank established the Islamic banking section that operates under the technical support of the Shariah Council consisted up of famous religious scholars from Afghanistan as well from some other countries.

The final draft of the Islamic banking law is in progress and will go to parliament for approval very soon. It is estimated that up to US$33 billion are in circulation in Afghanistan economy while more than US$4.2 billion is deposited in 17 banks and branches of national and international banks. Kabul Bank has a total deposit of US$850 million amongst these banks. Beside conventional banking, Kabul Bank has Islamic banking section started its operation in Feb 2010 and extended Islamic banking through Islamic Banking Windows Operation in all its branches throughout Afghanistan.
The current Islamic banking scenario in Afghanistan

Currently there is no full-pledge Islamic bank in Afghanistan and all the conventional banks have been providing Islamic Banking in Afghanistan. Most of them provide liability side products for deposits while investment side products are on the lowest level.
The only reason for the underdevelopment of Islamic investment in Afghanistan is the lack of Islamic law and regulations.
It is expected that the Islamic banking law in the country will tentatively be approved in September 2011. There are some parties interested to apply for a full Islamic bank licenses. To date five conventional banks are licensed to offer Islamic banking windows in Afghanistan:
1. Kabul Bank
2. Afghan Bank Mille
3. Afghan United Bank
4. Maiwand Bank
5. Ghazanfar Bank

Kabul Bank is the largest bank offering Islamic banking services through its 123 branches in all 34 provinces of Afghanistan. Total deposits in Islamic Banking industry in the country reaches up to US$70 million since last two years.
All the above mentioned banks did started Islamic banking in 2009 and 2010. Before this there was no concept of Islamic banking in Afghanistan and no bank was operating under Islamic banking principles.
Generally all these banks offer liability products under Mudarabah, Musharakah, Qard Hassan and Wadiah. Kabul Bank has a Shariah board to advise on the Shariah compliancy of its products while there are Shariah advisors are on the board of the rest of the banks which offer Islamic products.

All these banks have a limited number of investment products under Musharakah, Mudarabah and Ijarah structures. There are more than 10,000 Islamic banking customers in all five banks.
About 99% of Afghans are Muslims and the majority of them do not use banks due to the involvement of interest. Out of 30 million Afghans, only 1.8 million use banks. Ulamas and religious scholars have been very cooperative in preaching and promoting Islamic banking in Afghanistan.
Ghazanfar Bank, Maiwand Bank, Kabul Bank, Alfalah Bank, Bank Millie Afghan and Afghan United Bank are among the banks which obtained Islamic banking licenses in the country. Currently all these banks offer Islamic banking products and services including project financing, equity financing and house financing.

Challenges
There are many challenges in Afghanistan's Islamic banking sector which include the following:
1. Lack of public awareness about banking
2. Lack of legislation and regulatory framework
3. Lack of knowledge and human capacity
4. Inadequate investment capital
5. Lack of Shariah consensus among Ulema and Scholars
6. Lack of Shariah compliant technology and techniques
7. Lack of Shariah Scholars' understanding of Islamic principals
Shariah Compliances

Fortunately most of the banks offering Islamic banking services and products in Afghanistan have Shariah boards to play basic roles in promoting Islamic banking and adherence to Shariah principles. Shariah boards are the basic need for a sound and prudent Islamic banking.
Islamic banking accounts are open under the following principles: Mudarabah, Musharakah, Wadiah, Qard Hasan and others. Current accounts are under Wadiah and Qard Hasan, while investment accounts are under Mudarabah and Musharakah.
The preferred principles for investment accounts are Mudarabah and Islamic banks generally open investment accounts under Mudarabah. Kabul Bank uses Mudarabah or Musharakah for investment accounts, Murabahah for long term housing finance and sometimes uses Bai Mawjal for house financing with 15-year installments.

Mudarabah seems to be risky in Afghanistan because of its nature and the country's situation. In Mudarabah, the financier Rab al maal pays 100% capital while the working partner (Mudarib) does not contribute in financing but uses his or her own time and skills.
Also banks do use AAOIFI Standards to organize Islamic Banking services and products which are helpful to insure Sharia compliance in practice.

Trade Financing
Trade financing is the booming part of Islamic investment in Afghanistan and majority banks use Murabahah for trade financing as well as Musharakah. Afghanistan is depending on the import goods and a lot of banks do finance trade and commerce using the above mentioned principles. Generally traders are using Murabahah and Bai Mowajal to do their trade in Afghanistan. This is called Ograie mean the credit based sale with weekly repayment of installment and it is very famous. Because of familiarity with this principle already in practice Afghan traders do like to use this principle for trade financing. Sharia compliance Letter of Credits has been used for trade financing using the principles of Musharahah, Mudarabah and Murabahah.

Housing Finance
Murabahah has been the best principle for house financing, car financing and trade financing. Leasing or Ijarah is also under the consideration to be used in house financing.
In Murabahah the bank buys or prepares to buy the house first and then sell it to the customer. Some banks use Murabahah by disclosing the cost and profit margin while the rest use Bai Mowajal to sell after a 5% to 10% down payment is settled in the beginning with a tenor of three to 15 years. Kabul Bank has started with the 15 years schedule.
Kabul Bank, Azizi Bank and Bank Millie have already started housing finance for long term. Kabul Bank is the only bank in Afghanistan that gives the longest mortgage time that is 15 years.

Consumer Banking
Consumer banking is the most favorable banking in Afghanistan and there has been a lot of trust from the public in consumer financing. Up to now few banks introduced car financing schemes under Murabahah and Ijara Sum Bai (Hire Purchase) principles of Islamic Banking.

Construction Financing
Construction industry is one of the largest sector in Afghan economy and billions of US$ have been invested in this sector. Islamic Banks do use Musharakah and Mudarabah to finance the construction projects in Afghanistan. Meanwhile banks also do use Istisna for construction of residential and commercial buildings and complexes.

Industry Financing
Afghanistan is very poor in Industry because of its specific conditions and current political situation. But however there are some industries and more industries are coming. Islamic Banks use Ijara sumal Bai (Hire Purchase) to finance the machineries and equipments needed for Industries. Agricultural and Food processing has been the most favorable projects in Industry in Afghanistan.
Characteristics of Islamic banking in Afghanistan
* More transparency
* Asset backed banking
* Justice in profit and loss sharing
* More control on funds
* Islamic banking triggers more ac- tivities as well as more contributions from investors and working partners.
* Low level Risk in Islamic Banking and Investment
* Un-availability of Islamic Insurance or Takaful
* Lack of Technology for instance Core Banking
* Lack of decision makers attention and support
* Lack of capital investment

Islamic banking in investment
Islamic banking and finance is more efficient in investment financing. For investment financing in Afghanistan, Musharakah is used for equity financing, project financing and while for trade financing Murabahah and Bai Mowjal have been in use in Afghanistan. Mudarabah is very rarely used in financing. For housing finance Murabahah and Ijara wa Etina is used for financing in the banks. Car financing is very famous now amongst banks and lot of people is approaching to get cars through Islamic mode financing instead of Conventional mode of financing. Now banks are using Istisna for financing the construction of residential and commercial complexes in Afghanistan.

Afghanistan has emerging economy and there has been hundred of new businesses have been launched by Afghans in Kabul and other cities of Afghanistan. There is growing need for financing the business establishment and business financing.
Diminishing Musharakah is best for project and equity financing to finance business establishments. Ijarah can be used for machineries and equipment financing while Istisnah is for contract financing like manufacturing by order or construction of house on the land owned by customer and other such projects. Bai Salam for agriculture and horticulture financing, Muzara'ah for agricultural farming and Musaqah for land irrigation financing are considered to be used for Islamic Agricultural Financing..


Hindering factors

1. Lack of Islamic banking law
2. Lack of regulations
3. Lack of Shariah compliant technical support
4. Lack of public knowledge and awareness
5. Poor human capacity in banks and financial institutions
6. Lack of Fiqh councils
7. Lack of consensus amongst Ulema

Capacity Building
Lack of human capacity is most challenging factor hinders the Islamic banking promotion in Afghanistan. Lack of Capacity building has been the most challenging part for all banks offering Islamic banking in Afghanistan. Almost every bank does face this challenge and tries to cover it. There has been little work done so far to solve this problem. Kabul Bank has its own Training centers in its Main office and its Regional Offices throughout Afghanistan. Within 2010 and first quarter of 2011 we so far trained up to 400 staff member of Kabul Bank on the operational side particularly account opening and customer care. Central Bank of Afghanistan is also involved in capacity building efforts and recently it established Afghanistan Institute of Banking and Finance (AIBF) which also contributes in capacity building for banks plus Islamic banks.

Islamic Insurance
No existence of Islamic Insurance in Afghanistan has been the one of the largest challenges for Islamic Baking in Afghanistan. Investment side of Islamic Banking needs them very crucially. Every investment projects of Islamic Banking needs insurance and the conventional insurance cannot be used for insurance.
There has been some efforts from my and some of my friends to introduce Islamic insurance in Afghanistan. I am in touch with Ministry of Finance of Afghanistan and pushing for introduction of Islamic Insurance Takaful. But still there is a lot to be done to start Islamic Insurance. But there has been growing interest from the decision makers regarding Takaful. Also there is tremendous market demand for Islamic Insurance, because majority of the businesses and industries do not want to use conventional insurance. This because of Riba (interest) Gharar, and Maiser. So there is growing demand and interest in Islamic insurance as for Islamic banking in Afghanistan. This is very good opportunity for Takaful companies and to come forward and establish Islamic insurance companies in Afghanistan.

Dr Alam Khan Hamdard is the Chief of Islamic banking at Kabul Bank. He can be reached at alamhm@kabulbank.af

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