Afghan banks risk losing years of gains after regime change

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The Taliban’s takeover of Afghanistan has raised questions about the future of modern banking in this war-torn country after two decades of progress under the previous US-backed government.

The new regime has ordered the banks to reopen, with some restrictions, as it seeks to resume a normal life and gain legitimacy. He also appointed an interim governor for the central bank, who has sought to assure people that banking will continue as normal.

Under the new acting governor, Da Afghanistan Bank, or DAB, capped individual withdrawals at $ 200 or Afghans 20,000 per week and $ 25,000 per month for businesses after thousands of customers lined up at bank branches to withdraw money. Lending activities are on hold as banks move cautiously amid uncertainty.

“Private banks barely have enough physical liquidity to meet customer withdrawal requests for another month without central bank liquidity support,” Mr. Naweed Yosofi, Deputy Risk Director of the Kabul-based Private Lender Azizi Bank, told S&P Global Market Intelligence: “Banks receive their partial balances from their current and savings accounts with [the] DAB, although based on needs, to continue to run its operations. “

When the Taliban were ousted in 2001, Afghanistan was left without a functioning banking sector, although several financial institutions have banking licenses and a list of employees on their payroll, according to the International Monetary Fund. Since, The Afghan banking sector has grown to include 12 commercial lenders, three of which are state-owned and seven in the private sector. Total banking system assets stood at 327.01 billion Afghans, deposits amounted to 280.47 billion Afghans and gross loans amounted to 39.55 billion Afghans at the end of from 2020, according to DAB data. Private sector banks accounted for 67.4% of total banking sector assets, while public banks held a share of 26.9%.

Interbank transactions inside and outside the country using SWIFT, the international financial messaging platform, are not possible because SWIFT is currently out of service, Yosofi said, adding that without central bank support, banks may soon run out of liquidity. Previously, the DAB conducted market operations, fixing the value of afghani and controlling inflation, by auctioning US dollars.

Lenders, heavily dependent on a steady influx of dollars ahead of the US troop withdrawal and the Taliban takeover in August, could see their liquidity run dry if aggressive deposit withdrawals continue. Only 15% of the population has access to banking services and the economy is largely cash based.

The Afghan Chamber of Commerce and Investment, the Association of Afghan Banks and the country’s Money Exchangers Union called for the thawing of foreign exchange reserves and the problem of transferring money through banks abroad, according to a joint September 13 press release.

The country’s banking system shut down completely for a few weeks after the Taliban took power in Afghanistan on August 15. Further exacerbating the situation, the United States cut the Afghan central bank’s access to its more than $ 7 billion in assets, and the IMF suspended the country’s access to more than $ 370 million in funds. Others, including the World Bank and Germany, followed suit, leaving the new regime with limited space to run a functioning banking system. Germany was one of the largest foreign donors to Afghanistan and provided $ 409 million in grants in 2019, according to data from The Donor Tracker.

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“The situation raises the prospect of a serious economic and humanitarian crisis in Afghanistan, as the country’s banks cannot be self-sufficient without the support of the central bank,” said Abdul Samad Katawazy, adviser to the previous Afghan government. In most cases, customers are allowed to withdraw funds only in local currency, said Canada-based Katawazy..

What may help is that Afghan banks The ratio of liquid assets to short-term liabilities stands at around 85%, said Syed Masroor Hussain Zaidi, research analyst at Pakistan’s Foundation Securities. As a largely cash-based economy, the analyst said the overall dependence on the banking system is low. The currency in circulation represents about 50% of the country’s M2, a measure of the money supply that includes cash and liquid instruments, which is significantly higher than its neighbors, Zaidi said, adding that this “dilutes the quantum of this problem.”

In neighboring Pakistan, for example, the currency in circulation was 28.5% of M2 as of June 30, according to data from the State Bank of Pakistan.

Zaidi, however, warned that Afghan lenders could see a further increase in their NPLs.. Non-performing loans reached nearly 22% of total loans in 2020 from 15% in 2019, according to the central bank.

Acting central bank governor Mohammad Idrees said on September 15 that Afghan banks, on average, keep 50% of their capital with them in cash, local and foreign currencies, and that “banks are completely secure. ” and “the banking sector is in good shape.”

“Commercial banks are operating according to procedures (…) and will soon return to normal,” Idrees added. “All of the commercial banks operating in the country are under serious scrutiny and are operating better than before.”

The central bank did not respond to an email from Market Intelligence seeking comment on the potential crisis facing lenders.

As of October 8, US $ 1 was equivalent to 90.71 Afghani.


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