This information is derived from the State Department's Office of Investment Affairs' Investment Climate Statement. Any questions on the ICS can be directed to EB-ICS-DL@state.gov
Last Published: 11/2/2016

Afghanistan is in principle welcoming toward foreign portfolio investment, but financial institutions and markets are at an early stage of development.

Money and Banking System, Hostile Takeovers
Most Afghans remain outside the formal banking sector; roughly 10 percent of the population has bank accounts. Afghans continue to rely on an informal trust-based process referred to as Hawala to access finance and transfer money, due in part to religious acceptance, unfamiliarity with a formal banking system and limited access to banks in rural areas. Three of the four major mobile network operators - Etisalat, AWCC, and Roshan - offer mobile money services, with the fourth, MTN, planning to roll out their mobile money products in 2016. Further, the Afghan government plans to launch mobile money salary payments in the Ministry of Labor in March 2016. If successful, the government plans to expand mobile money payments to the ministries of Education and Interior Affairs.

Still, finance is Afghanistan's second-largest service industry behind telecommunications and is potentially an important driver of private investment and economic growth. As of December 2015, 15 commercial banks were operating in Afghanistan, with total assets of approximately USD 3.85 billion. There are three state banks: Bank-e Millie Afghan (Afghan National Bank), Pashtany Bank, and New Kabul Bank (formerly the privately owned Kabul Bank), and there are also branch offices of foreign banks, including Alfalah Bank (Pakistan), Habib Bank of Pakistan, and National Bank of Pakistan.

Banking remains highly centralized, with a considerable majority of total loans made in Kabul Province. Bank lending is undermined by a deficient legal and regulatory infrastructure that impedes the enforcement of property rights and development of collateral, though a banking reform law passed in 2015 could improve conditions. The aggregate loan-to-deposit ratio for the banking sector is 19.8 percent, and most banks concentrate on fee-based services and short-term credit to well-known customers. 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 financial sector.

The 2010 exposure of pervasive fraud at Kabul Bank revealed the underlying weaknesses in banking regulation and supervision. A recipient of significant technical assistance, the Afghan central bank Da Afghanistan Bank (DAB) has made improvements in monitoring and supervising the banking sector. Following his inauguration in September 2014, President Ghani moved to reopen the Kabul Bank investigation. Subsequently, the Supreme Court upheld an October 2014 appellate court ruling that froze the assets of certain debtors and extended the sentences of previously convicted officials involved in the case. The Afghan Government has a plan to recover assets from perpetrators of the large-scale bank fraud, though progress on its implementation remains sluggish and fraught with outside interference.

Formal credit to the private sector stands at less than 10 percent of GDP, significantly lower than other countries in the region. Afghanistan ranks 97 out of 189 economies for ease of obtaining credit in the World Bank's Doing Business 2016. Afghan entrepreneurs complain interest rates for commercial loans from local banks are high, averaging around 15.5 percent. In response to this situation, investment funds, leasing, micro-financing and SME-financing companies have entered the market. Yet, despite strong donor support for many of their activities, these firms have been handicapped by difficulties in securing repayment. USAID is working with the Afghan government and the banking sector to promote improved access to finance and the expansion of financial inclusion. In March 2015 the U.S. Department of Treasury and the Afghan Ministry of Finance reinitiated financial capacity building and technical assistance at both DAB and MOF. As of writing, assessments have been conducted in banking supervision, public financial management, and revenue management to determine assistance needs.

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Afghanistan Economic Development and Investment Law