How to run a bank in Afghanistan

Source: https://www.economist.com/blogs/economist-explains/2018/01/economist-explains-1

Winning trust is vital in a banking system with a history of fraud

PEOPLE want to keep their money safe. Rather than stash it under the mattress, they turn to banks, often in return for interest on their cash. But the financial system can really only function if people can trust that strangers will not run off with their money. In Afghanistan, earning that trust is not easy. 

In the past unscrupulous bankers there have got away with theft of spectacular proportions. In 2010 Kabul Bank collapsed after a spree of insider loans to shareholders, including a brother of the then president, and a run on the bank. Nearly $1bn was stolen, mostly money that had been deposited there by foreign donors. (As a comparison, the entire economy produced only around $19bn in 2016.) Much of the loot has yet to be recovered. Only a tenth of Afghans have bank accounts, and the theft at Kabul Bank convinced many that they are better off looking after their own cash. Around 24,000 safes were reportedly sold during the run on the bank. 

But being a credibly virtuous bank can pay off. As the only private institution that has a dollar-clearing facility with big international banks, Afghanistan International Bank (AIB) is the main banker for Afghanistan’s commodity importers. Other customers include charities, embassies and the American army. But in order to keep their business AIB must maintain its clearing relationships with two foreign banks, Standard Chartered and Commerzbank. It does this by adhering strictly to international anti-fraud and anti-money-laundering rules. In a country with a thriving opium trade, that means laborious inspections of invoices and spot-checks of premises.

Founded in 2004, AIB is now the largest private bank in Afghanistan, holding one-fifth of the country’s deposit base. And it is also the most profitable. It is so trusted that it does not even pay interest on its deposits. Like other Afghan banks, it lends little, because borrowers very rarely have formal financial records or credit histories. Instead, half of its revenues come from fees earned on cash withdrawals, cash transfers, foreign-currency transactions and service charges on current accounts. The secret to running a successful bank in Afghanistan seems to involve winning depositors’ trust, but keeping borrowers at arm’s length.