New Afghanistan banking law may jump-start Islamic finance

Afghanistan could have a new banking law approved by parliament in a few months including provisions for Islamic products, which may help to draw hundreds of thousands of people into the formal financial sector.

In one of the poorest countries in the world, Afghanistan's government faces a growing fiscal crisis aggravated by a drop in foreign financial aid. An estimated nine out of 10 households in the Muslim-majority nation of 30 million shun interest-based finance, at least partly for religious reasons.

The central bank, Da Afghanistan Bank (DAB) [AFCB.UL], is finalizing a regulatory framework for Islamic banking which will be ready by the time the new law is passed, Akhond Jan Rustaqi, acting deputy director general of Islamic banking at DAB, told Reuters.

"The new banking law, which includes Islamic banking, is with the parliament and DAB hopes it will be adopted by June."

Currently, Islamic banking products are offered by a handful of lenders through so-called Islamic windows, but there is no standalone Islamic lender. As of last June, Afghan banks held $4.2 billion in assets and $813 million in outstanding loans, according to the World Bank.

The central bank has stopped processing banking license applications until the new law is approved, said Rustaqi.

The new banking law and the central bank's rules will cover areas such as operating procedures, contract specifications and the operation of a centralized sharia board to determine whether products obey Islamic principles.

Banks with Islamic windows include Afghan United Bank, Ghazanfar Bank and state-owned New Kabul Bank. Afghanistan International Bank launched an Islamic window last year.

RULES

The central bank's Islamic banking rules have been developed over the past year by Afghanistan Holding Group and Malaysia's Amanie Advisors, with funding from Harakat-AICFO, a non-profit body which channels funds from foreign donors into projects that help to develop the Afghan economy.

The rules are important because several banks want clearer guidance to expand their existing windows or convert themselves into full-fledged Islamic banks, said Ahmed Bassam, managing partner atAfghanistan Holding Group, a consultancy.

"The unbanked population is very conservative, interest is considered haram (unlawful), and banks haven't been able to utilize this market."

A survey by Harakat-AICFO found 83 percent of households in five major urban centers wanted access to mortgage loans, but 93 percent of respondents preferred non-interest based financial products. Housing demand was estimated at 1.5 million dwellings in 2014 by the World Bank and DAB.

Some customers have remained cautious about using Islamic windows because of doubts over their religious permissibility, so the creation of full-fledged Islamic banks could prove crucial.

"The public had lost their confidence and trust in Islamic windows as there was no official regulatory framework in place from DAB to regulate Islamic banking," said Abdul Ali Farahi, senior project manager at Harakat-AICFO.

(Reuters / 29 March 2015)

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Afghanistan: World Council Announces First Islamic Finance Manual for Credit Unions

In Afghanistan, Helmand Islamic Investment and Finance Cooperative's accountant (right) receives training on end-of-month adjustments from the IIFC Group head of Helmand province.

MADISON, Wis. - World Council of Credit Unions has published theIslamic Finance Manual: Operating Policies and Procedures for Credit Unions, the first known guide to establishing Shariah-compliant credit unions in the developing world. The Customer Owned Banking Association, World Council's member organization in Australia, developed the manual based on World Council's experience establishing Islamic investment and finance cooperatives in Afghanistan (2004-2012).

The comprehensive guide details operating policies and procedures based on international standards for financial cooperatives and adapted to comply with Islamic Law. The 305-page document addresses membership, shares and savings mobilization, Shariah-compliant financing and collection, provisions and allowances for bad debts, asset and liability management, capitalization and capital adequacy, accounting, cash operations, internal controls, human resources, procurement and information technology and security. Each chapter includes a comprehensive review of procedural requirements and who should be involved, including template forms and contracts.

"The Islamic Finance Manual produced with the initiative of the Customer Owned Banking Association of Australia is a product of years of dedication and cooperation among World Council staff and local Afghan leaders to adapt World Council's traditional credit union building model to an Islamic banking environment," said Brian Branch, World Council president and CEO. "The manual now provides a cornerstone for local credit union development in countries as diverse as Libya and Pakistan to Australia and the United States."

World Council's nine-year program in Afghanistan, through which the manual was developed, focused on establishing sustainable financial cooperatives as well as a national apex trade association. World Council consulted Islamic scholars and local religious leaders to modify its traditional credit union development methodology and establish the country's first fully Shariah-compliant financial institutions. Today, more than 30 IIFCs and points of service in 14 provinces across the country offer share savings and loan products that heed the Islamic prohibition on paying or receiving interest. Afghanistan's national financial cooperative association, the Islamic Investment and Finance Cooperative (IIFC) Group, was established in 2009 and became a World Council member in 2012. Afghan IIFCs comprise the world's youngest credit union movement and is the only one to claim full compliance with Islamic Law.

Islamic finance is a form of ethical financing, defined by the fair distribution of wealth, concern for the welfare of communities and economic stability. Islamic finance principles promote the protection of consumer rights and prevent investment in businesses that are considered "harmful," including gambling, armaments, alcohol and pornography. The creation of economies based on physical assets is at the heart of Islamic finance - a key reason why the Islamic financial sector was largely unaffected by the recent global financial crisis. Islamic financial markets operate in 37 Muslim countries, and many non-Muslim countries in Europe offer Islamic finance options.

(Zalora / 30 July 2013)

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Islamic finance a boost for USAID's Afghan farm fund

SYDNEY, Feb 7 (Reuters) - Economic instability and legal

obstacles have slowed the introduction of modern forms of

Islamic finance in Afghanistan. But sharia-compliant loans are

Islamic finance in Afghanistan. But sharia-compliant loans are

beginning to play a role in the farm sector through a

U.S.-funded aid programme.

The Afghan government is using Islamic financial contracts

to extend credit to farmers in areas where conventional banking

has not fully satisfied demand for funds.

The Agricultural Development Fund (ADF), set up in 2010

through a $100 million grant from the U.S. Agency for

International Development (USAID), offers both conventional

credit and Islamic financing.

About $11 million of its loans approved between May 2011 and

April 2012, or 70 percent of them, were sharia-compliant, the

ADF says. Islamic finance obeys a religious ban on payment of

interest and instead pays lenders with returns on real assets.

Demand for such financing has been particularly strong in

rural communities because people there tend to be conservative,

(Chicago Tribune / 07 Feb 2013)

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Afghanistan Planning Sukuk as Foreign Aid Ends

Afghanistan plans to sell Islamic bills for the first time early next year, as it prepares for a reduction in international aid after the withdrawal of foreign troops in 2014.

Draft laws will be submitted to the government “soon” and an offering of longer-maturity sukuk will take place at the end of 2013, Noorullah Delawari, the head of Da Afghanistan Bank, said in an interview yesterday. Progress stalled in 2011 following the resignation of his predecessor in June over the disappearance of funds from Kabul Bank, which was the largest commercial lender.

The nation, invaded twice in the past four decades and riven by civil war, is looking for alternative financing as it prepares to become self-sufficient by 2025, Wahid Tawhidi, a Finance Ministry spokesman, said in a June 10 interview from Kabul. Total banking assets have increased to $4 billion from $100 million a decade ago, with 10 percent complying with Islamic principles, according to data from the central bank.

“Sukuk will offer the first light to the Afghan debt market,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said in an e-mail on June 9. “The good thing will certainly be that dependence on foreign grants will be lowered, and a new market will appear on the map for sukuk investors that will provide interesting diversification opportunities.”

Funding Gap

The South Asian country currently sells short-term securities that don’t comply with Islamic tenets to help local banks manage their funds, and these will be replaced by the new Shariah-compliant notes, Khan Afzal Hadawal, the first deputy governor of the central bank, said in a May 28 interview.

The monarchy was deposed in a coup in 1973 and the Soviet Union invaded to support the communists’ claim to power. The nation has been ravaged by civil war ever since, with the Taliban rising to prominence in the mid-1990s until the U.S.-led invasion in 2001. Some U.S. troops will remain in Afghanistan after the 2014 withdrawal as agreed by President Barack Obama and his counterpart Hamid Karzai during the signing of a strategic partnership pact in Kabul in May.

Former central bank Governor Abdul Qadir Fitrat quit and fled to the U.S. last year after investigators called him in for questioning over Kabul Bank.

Siamak Herawy, a spokesman for President Karzai, said at the time that Fitrat left the country following a letter from the attorney general asking for an explanation over the scandal. Fitrat said he had resigned because he received threats from officials he had implicated, the Ariana Television channel reported.

The international community has provided $56.8 billion in aid to help rebuild the country since 2001, Tawhidi said. Natural resources such as copper and coal will lift government revenue and fill the funding gap, he added.

Afghanistan has 17 banks, with seven providing Islamic services at booths, Emal Hashoor, the central bank’s spokesman, said in a June 10 interview. About 99 percent of the 30 million people are Muslim, according to the CIA World Factbook.

‘Stabilize’ Markets

“Selling Islamic bonds will help stabilize Afghanistan’s capital market,” the central bank’s Hadawal said. “Sukuk is important to develop the country’s financial market because it complies with Shariah law.”

Global sales of Islamic bonds, which pay returns on assets in accordance with the religion’s ban on interest, almost doubled to $16.6 billion in 2012 from a year earlier, after reaching a record of $36.7 billion in 2011, data compiled by Bloomberg show.

The securities returned 3.8 percent this year, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index, while debt in developing markets gained 5.6 percent, JPMorgan Chase & Co.’s EMBI Global Index shows.

Average yields on Shariah-compliant notes fell four basis points to 3.69 percent last week, according to HSBC. That’s 194 basis points, or 1.94 percentage points, less than developing- market bonds, a separate JPMorgan index shows. The difference between average yields on Islamic debt and the London interbank offered rate narrowed five basis points to 263 basis points.

‘Cautious’ Banking

The yield on Malaysia’s 3.928 percent dollar-denominated sukuk due in April 2015 was little changed at 1.95 percent yesterday, according to data compiled by Bloomberg. The difference in yields between Malaysia’s debt and the Dubai Department of Finance’s securities maturing in 2014 shrank three basis points to 179 and has declined 33 basis points since the end of May.

Afghanistan’s introduction of Shariah-compliant banking laws should draw local investors who shun lending that doesn’t comply with Islamic tenets, Malek Khodr Temsah, vice-president of treasury and investment at Albaraka Banking Group (BARKA) BSC in Manama, Bahrain, said in an e-mail on June 10.

“A government sukuk has the potential to attract considerable sums from Afghan citizens cautious of the country’s traditional and conventional banking system,” he said.

The economy expanded 7.1 percent last year, slowing from 8.2 percent in 2010 and 20.9 percent in 2009, according to the CIA World Factbook. The country isn’t rated by Moody’s Investors Service or Standard & Poor’s. Afghanistan is ranked the 13th poorest country in the world by the CIA, with gross domestic product per capita income of $1,000 in 2011, compared with an estimated $2,800 for neighboring Pakistan.

‘Stability Issues’

U.S. Defense Secretary Leon Panetta visited Kabul last week to assess troop pullout plans as attacks on coalition forces by the Taliban and the Pakistan-based Haqqani network escalated. Four French soldiers were killed in the northeastern province of Kapisa at the weekend, the office of President Francois Hollande said in a statement, as the country also prepares to withdraw.

U.S. Marine Corps General John Allen, the top coalition commander in the nation, has “expressed concern at the renewed level of attacks,” said Panetta.

“It’s very hard for mutual funds to invest in Afghanistan,” Anas El Maizi, an Abu Dhabi-based fund manager at Royal Capital PJSC, said in a June 5 interview. “There are so many political uncertainties and stability issues that investors won’t be keen on. It will be local investors or international bodies such as the World Bank that will invest.”

(Bloomberg Business Week / 11 June 2012)

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Afghanistan mulls sukuk, the Islamic bonds

(Reuters) - Afghanistan, which has only a semblance of a capital market, intends to sell Islamic bonds as it braces for a possible sharp fall in Western financial support as the war against the Taliban winds down, a senior central bank official said this week.

The official said the sale of short-term Islamic bonds, also known as sukuk, is still in the planning stage, but could be a new way of raising money for the government.

"The purpose is so that the ministry of finance can have tools for their financing to cover their expenses," Khan Afzal Hadawal, first deputy governor at the Afghan central bank, told Reuters in an interview.

"We have to develop the financial markets of Afghanistan. We have to offer those instruments not only for the banks, (but) so that the government has an alternative to finance their projects and the central bank can control money growth."

Billions of dollars in Western aid have propped up the economy since the Taliban government was toppled in 2001. Now Afghanistan faces the prospect of Western cash evaporating after most foreign combat troops withdraw by the end of 2014.

One of the world's most unstable, corrupt countries hopes financial creativity based on Islamic sharia law will help soften the blow, and ultimately deepen its nascent financial markets.

The sukuk are expected initially to be issued in the Afghani currency and offered to local banks within the next year. They may gradually be expanded to medium- and long-term bonds.

A draft law on the bonds must be approved by the justice ministry, and possibly parliament, and should be completed by the end of September, Hadawal said.

Afghanistan may need around $7.8 billion a year in foreign funding to help pay its security and other bills after most U.S.-led NATO combat troops leave, according to the World Bank. It is likely to receive about $4.1 billion in aid for its security forces per year after 2014, but that number could fall.

In the runup to a NATO summit this weekend, the U.S. government has been pressing reluctant European allies to offer around one third of the estimated $4 billion annual cost of financing Afghan forces after 2014.

If international backers slash funds severely, Afghanistan's government may be forced to reduce spending on security and development, making it even more unpopular, and its control of the country even more fragile.

The reputation of Afghan financial institutions was badly damaged in 2010 by a scandal involving Kabulbank, which gave hundreds of millions of dollars in unsecured and undocumented loans to the country's elite, including sitting ministers.

SOMETHING NEW, SOMETHING SECURE

The government hopes the Islamic bonds will give Afghans a sense of stability, and expand financial activities beyond the primary and secondary markets for central bank paper.

"(Sukuk) are something new and people have access to financing, something compliant with sharia ... and the most important thing is, something very secure, guaranteed and people are not worried that they will lose it," Hadawal said.

Islamic bonds will gradually replace capital notes that used to manage liquidity and have weekly auctions of around $40-$80 million depending on market conditions, central bank officials said. Total investment in capital notes stands at around $714 million with yields of about 2.13 percent for 28-day paper.

Unlike mainstream bonds, sukuk do not involve interest payments, which are forbidden in Islamic finance. Instead, holders receive returns from underlying assets.

Details of the assets, amount, maturities and issuance time-frame would be determined after Afghanistan gets technical assistance from the International Monetary Fund, Hadawal said.

"We do not have the people ... who are familiar with the products, with the terms and then with the maturities," he said.

The Afghan finance ministry declined to comment.

Afghanistan is one of the poorest countries in the world, with annual per capita income of just $528. Its fast-growing population means that to provide jobs, the economy must expand far more rapidly than in other countries.

The central bank forecasts economic growth of 7.3 percent this year versus 3.7 percent in 2011, driven by agriculture and agri-business, but future expansion is likely to depend on major mining projects coming online.

(Reuters / 17 May 2012)

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