Banking System in the Afghanistan’s Economy
Master student of dept. “Banking and Financial Markets”, Ural State University of Economics, Yekaterinburg, Russian Federation (620144 Russia, Yekaterinburg, street 8 Marta, 62), email: firstname.lastname@example.org
Under supervision of Serebrennikova A.I.
Associate Professor, Ph. D. of dept. “Banking and Financial Markets”, Ural State University of Economics, Yekaterinburg, Russian Federation (620144 Russia, Yekaterinburg, street 8 Marta, 62), email: email@example.com
The article is devoted to the consideration of the interrelation between the development of the banking system and the economy of Afghanistan. Particular attention is paid to the history of creation and the current state of the banking system. Further, the problems of the formation and the functioning of the banking system are presented at the present time. The author focuses on the problems associated with the insufficient regulation of the banking system functioning by the government and the Central Bank.
Статья посвящена рассмотрению взаимосвязи развития банковской системы и экономики Афганистана. Особое внимание уделяется рассмотрению истории создания и современного состояния банковской системы. Представлены проблемы формирования и функционирования банковской системы в настоящее время. Автором делается акцент на проблемах, связанных с недостаточностью регулирования функционирования банковской системы со стороны государства и Центрального банка страны.
Key words: Banking system, Afghanistan, economy, central bank.
Banks, as financial institutions, are one of the basic factors that make up the economy of each community. Banks are responsible for the turnaround of an economy and they can hold the economic pulse of a country. The reason is that these are the same banks that print and produce money in a market, control flow of money in the market and most importantly the transaction of outside capital is done by such institutions, furthermore, being consumed for the new development foundations of a country. In fact it’s the capital protector of the country. There are private and public sectors of banking system in Afghanistan where all of these banks are controlled by the Da Afghanistan Bank or the Central Bank of Afghanistan.
Afghan National Bank is the first bank founded in 1933 and the operations of the bank were limited. Despite its name being national until the governance of President Dawud Khan this bank was categorized as a private bank and later was brought in the range of government activities. Three years after the foundation of the National Bank, Da Afghanistan Bank as central bank of the country was established. But after 1950s, the number of banks was on the rise, including mortgage lender, Construction Bank and Export Development Bank. 
In Afghanistan today we are witnessing the existence of three state banks; Bank-e Millie Afghan , Pashtany Bank and New Kabul Bank (formerly the privately owned Kabul Bank), and there are also branch offices of foreign banks, including Alfalah Bank, National Bank of Pakistan, Habib Bank of Pakistan and comprising fifteen fully licensed commercial banks. Late in 2003, the Central Bank resumed the licensing process. The Afghan government has been working not only for development of the government banks but also to provide opportunities for the commercial banks so they can fulfill programs for the country’s economic activities and to move the financial resources towards activities which are beneficial and productive for the economy. In the past four years, private banks are increasing and are somewhat effective and playing active role in the economic development. Private Banks have facilitated the account opening for business sector and by provision of modern banking management. These banks are accounted for quick money transfer, safe haven for public funds and have more transparent process than it used to be before, thus bringing people’s confidence in a higher level and these values can strengthen the economic infrastructure through loans or other economic activities. For a better image of these banks which are operating currently, following is the list of the private, government and foreign banks with the year of establishment in the country in a chorological order.
Table: Structure of Afghanistan’s Banking System 
State Owned Banks:
- Bank –e Millie Afghan, 1933
- Pashtany Bank, 1945
- New Kabul Bank ( before Kabul Bank), 2004
- Afghanistan International Bank, 2004
- The First MicroFinance Bank, 2004
- Arian Bank, 2004
- Azizi Bank, 2006
- Afghan United Bank, 2007
- Ghazanfar Bank, 2009
- Maiwand Bank, 2009
- Bakhtar Bank, 2009
- Afghanistan Commercial Bank 2013
Branches of Foreign Banks:
- Habib Bank, 2003
- National Bank of Pakistan, 2003
- Bank Alfalah Limited, 2005
The rise of banking sector in last decade was due to the simple conditions by the government in policy of opening a bank in order to encourage the investors and provision of facilities for the investment in the financial and monetary institutions of the country after the fall of the Taliban. This was indeed a positive step by the government towards the resumption of the fledgling economy of the country. 
Banking sector improved after the rehabilitation of the country and as of the report produced by the central bank, it shows that the banking sector had a total assets of AFN 270.69 billion as of 2015 which is a 5.48% growth compared to the financial year of 2014; total gross loan amounted to AFN 45.41 billion with a 2.01% growth; customers deposits which are considered as the main funding source in banks, amounted to AFN 237.00 billion with 8.29% growth compared to previous year; the total capital of the banking system experienced a decrease of 17.61% which is mainly attributed to profit clearing accounts of FX revaluation with claims of that bank on ministry of finance. The banking system gained a total net profit of AFN 522 million during the FY 2015 which shows a decrease of 74% from the net profit of AFN 2.18 billion of the previous year. This decrease is mainly attributed to increase in provision of loans. In addition, the ration of Return on Assets has also decreased from 0.83% to 0.20%. [2, p. 13 – 15]
These figures express good growth in terms of assets, loans and deposits of the banking sector compared to last financial year which are mostly contributed by the private banks. The activities and operations of private banks of Afghanistan are faster than the state-owned banks and the reason for it is that the system of private banks are fully equipped with new, modern banking system and Internet. In case of transferring money from one province to another they have made it comfortable for the people. After the arrival of foreigners and international force the management and banking system of western countries has mostly affected the banks in the country unleashed the profit or the provisions of the product not permissible to earn.
Afghanistan's economy was shattered by decades of war. Until 1992 the Afghan economy was declining gradually and until the reform 1995 to 2001 the economy went in to the ground. Country from this area was severely damaged and caused recession in the economic life of the nation. It resulted to the halt of circulation currency and working capital as there was no support from banking sector and also loss of the most part of fixed capital. Afghanistan's economy significantly rose after 2002 with the help of international aid.
Three years after reform of the country in 2005, Afghanistan's central bank communication system was connected to the Swiss system. This international banking system is a system which can maintain banking communication anywhere in the world with high speed in less time. But despite this, the system is still limited in small circle of economic activities in Afghanistan because it has not yet been completed and it’s still in developing stage.
The state owned banks were lacking a proper system and capacity and also failed to create any kind of agenda. Some of them even operate having license issues. On the other hand, during three decades of war people were frightened to deposit money to the banks, thus banks had no money to invest or to make loans so that they can drive economic activities in the field of trade, production or building factories and to do other activities.
According to some economists in the country, these banks have failed in their activities and could not satisfy the nation. As one of the main functions is the money transaction but the state owned banks due to lack of computerized and modern system were unable to perform simple transactions and when the international community wanted to transfer money for Afghanistan there was no single bank to receive the money. 
Despite the increasing number of private banks in Afghanistan in recent years they are not able to cover all economic activities. It should be mentioned that from the foundation of banks and banking system in Afghanistan till present time these financial institutions could not operate in the way they had to and from the money transfers they couldn’t contribute to the growth and development of agriculture, investment in the exports and imports and finally strengthening the economic infrastructure. Most Afghans remain “unbanked,” with only a small percentage of Afghans currently holding bank deposits. Moreover, many Afghans continue to rely on money service providers (or hawalas) to access finance and transfer money, due to the unfamiliarity with a functioning banking system and limited access to banks in rural areas. Banking remains highly centralized with more percentage of loans made in capital and bank lending is also undermined by a deficient legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral. The difficulty of accessing credit through banks and other formal financial institutions makes existing firms dependent on family funds and retained earnings, limits opportunities for entrepreneurialism, and reinforces dependence on the informal credit market. 
Although credit to the private sector increased after three years for the first time since the Kabul Bank crisis, part of the increase reflected valuation changes on foreign exchange denominated loans and credit growth over the past few years has been low. The low level of private credit—equivalent to only 4 percent of GDP—reflects the scarcity of profitable lending opportunities, given limited information available on potential borrowers and the difficulty in realizing collateral or collecting loans from delinquent borrowers, rather than low supply of funds. Afghanistan ranks 101th out of 190 countries for obtaining credit in the World Bank's 2017 “Doing Business Report.” In response to this situation, investment funds, leasing, micro-financing, and SME-financing companies have begun to enter the market. [10, p.53]
The Central Bank, has taken important steps to improve banking regulation and supervision in recent years. However, serious challenges remain, including lack of capacity, limited operational transparency, a weak legal framework, and further need for improvements in supervision. The Central Bank is now conducting both on- and off-site supervision of all 15 commercial banks. Most bank loans have traditionally been structured as lines of credit rather than term loans, which tends to obscure the true level of non-performing loans. 
The current status of country’s banking system is not in a very good condition and to prevent financial and monetary crises it requires monitoring and detailed assessment from the Central Bank and the government. As it caused numerous problems, including the Kabul Bank crisis as the largest private bank of the country was eventually shut down and lead to bad effects on the banking system of the country and unemployment of thousands of people. After the crisis the bank was given partially to the Ministry of Finance and the Afghan National Bank and restarted its operation under the name of New Kabul Bank.
After that the theft of one million and one hundred thousand of dollars by an ordinary employee of Azizi Bank as the second largest private bank reflected the situation as bad supervision and management in the banks and affected the trust of investors and businessmen on the country's banking system which later severely damaged and reduced the deposits in the bank and an overall slowdown in the banking system especially private banks. 
All this shows the weakness of monitoring and evaluation system not only from leading private banks but also from the Central Bank which this operation of monitoring and controlling is the second most important duty of the central bank after publication of money. Not only that but also to prevent such incidents the prosecutors and the perpetrators of similar cases are not punished by the government so in the future like these cases shall not repeat and to play its vital role in creation of image and trust of banking.
In addition according to some experts on Afghanistan’s economy, the banking sectors in the country haven’t been working on the investment and provision of credit for production sectors so they could serve the development and prosperity of Afghanistan. Majority of banks gaining profit from the loans on seventeen percent or above which are certainly not affordable at the current economic situation and manufacturing and construction firms are not benefiting from it. 
Referring to the above points the banking sector in the country not only unable to improve the development of country’s economy but also has badly affected the financial sector of the economy. If the economic focus is not established and the banking sector doesn’t operate in the manufacturing and agricultural markets, in the absence of financial assistance of the international community, the capital of the country both morally and economically will be removed and there will be a deep suspension in the economy of the country.
Therefore, creating close ties to the central bank to monitor and evaluate
the precise activities of private banks and create a healthy administration
in the leadership of the provisions, operations, accounting and financial
leadership of liquidity banks, the income of banks, led by the risk of
activities banks, led by Bank staff and pinpoint the objectives and the
means of achieving them can be effective in solving the problems of
corruption and banking crises.
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World Bank group flagship report, Doing Business 2017, page 53