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Afghanistan: Opening up
Zulfiqar Ali Khan

In Afghanistan the Islamic banking system operates in parallel with the conventional system, and has transformed from humble beginnings in 2009 to a vibrant and dynamic system that is able to fulfill the banking needs of Afghans. It has been entrusted with the task of promoting and developing Shariah compliant banking as a parallel and compatible banking system in the country.

Islamic banking is one of the emerging fields in the global financial market, having tremendous potential and growing at a very fast pace all around the world. Al-Hamdulillah, the progress of Islamic banking in Afghanistan has also been commendable during the last three years. Currently there are six Islamic banking windows in licensed banks and the number of windows are expected to grow.

The year 2011 was a successful year for Islamic banking in Afghanistan. The most significant success is evident in the strong alliance among the players within the industry as well as within the relevant institutions including educational institutions and governmental ministries such as the ministry of rural development, the ministry of agriculture, and the ministry of finance intended for Shariah compliant projects in the country. This is coupled by demand from donors’ communities for Shariah compliant projects, such as USAID, the International Monetary Fund (IMF) and the Islamic Development Bank (IDB). Finally, there are already depository microfinance institutions (DMFIs) that are working with local communities to offer Islamic-themed financial services acceptable to them.

The deposits of the Islamic banking windows (IBWs) have shown very positive growth in 2011, with accumulated deposits rising to US$149.98 million from US$60 million in 2010. Both deposits and financing activities in the Islamic banking system have shown a positive growth from 2010-2011 as shown in Table 1. Among the most common and successful Islamic products used in Islamic banking windows in Afghanistan are joint venture Musharakah investments. Products such as Mudarabah, Murabahah and Ijarah, Istisnah, Salam and Qard Hasan are also major products offered by Islamic banking windows.

Future direction
The Islamic financial services industry is currently experiencing double digit growth, and although the industry is still in its early years compared to the conventional financial system, the rapid growth and positive performance of the Islamic banking system signifies one of the major accomplishments over the last three years in Afghanistan.

This year will be an important year for the growth of Islamic banking and finance, as the Islamic banking law is expected to be endorsed by the ministry of justice and the Afghan parliament, thus opening the doors for fully-fledged Islamic banking players. Our system will open opportunities for establishing fully-fledged Islamic banks, locally owned banks, and provide opportunities for global Islamic banks to invest in Afghanistan.

As Islamic banking in Afghanistan journeys toward global integration and international standards, there are key areas in the banking industry that need to be enhanced to progressively support future development. Islamic banking system in Afghanistan already has some embedded key values and essence that are needed to move forward. The introduction of new Islamic banking products and services will continue to be a vital task if reviews are not made to the existing framework and structures governing the issuance of global Shariah compliant products.

Last but most importantly, the Islamic banking industry is currently facing the problem of lack of human capital in Islamic banking and finance industries, and convergence of Shariah interpretations. Different Islamic countries have adopted different practices in relation to various Islamic banking product and services which is a result of the varying interpretation on various Shariah issues across jurisdictions due to the different schools of thought among Shariah scholars. This may have implications for cross-border flows in relation to investment and trading of international Islamic instruments.

The harmonization of Shariah interpretations will lead to the creation of more homogeneous Islamic banking products and services that in turn will increase demand and enhance the overall growth of the Islamic banking.

Zulfiqar Ali Khan is the director of Islamic banking division at Da Afghanistan Bank (central bank). He can be contacted at za.khan@centralbank.gov.af .

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