Catalog

Banking from Scratch
ADB Review [ December 2005 ]

Like bread in this bakery, creating a new business in Afghanistan requires starting with the basics

By Eric Van Zant, (evanzant@adb.org)
Consultant Writer

BRIGHTER FUTURE Small businesses are benefiting from access to credit

Afghanistan was more than ruined buildings as it emerged from a quarter century of war. Financial institutions that other poor countries take for granted had ceased to function or no longer commanded trust among the people, and the central bank had only a loose grip on the currency. By contrast, the ancient cash-based Hawala system enjoyed customer loyalty others could only envy.

Afghanistan International Bank (AIB) was among the first private financial institutions created to step into this void, aiming to set up a commercial and local bank that could foster private sector development crucial to reviving the postwar country. Under a banking contract with Dutch banking giant ING, and with support from the Asian Development Bank, AIB is now helping rebuild the country’s shattered financial sector.

“It was very basic when we started here, and we had to start from scratch. This is not a branch office of a foreign bank, we were setting up an all-new local bank. We needed not only to find the building, but create a whole new banking operations system. We couldn’t just adopt the system of a parent organization,” says AIB Chief Executive Officer John Haye, a banking veteran who came to AIB from ING.

AIB was established in Kabul in March 2004 as a local bank, operating to international standards. In August 2005, it opened a branch in Mazar-e-Sharif, followed by a branch in Kandahar in October. It is also finalizing plans to open a branch in Herat.

Staffing was among the first challenges, says Mr. Haye. “We couldn’t just bring them over from a parent. AIB is first and foremost a local bank, and we want to be perceived that way. So we were at first looking for local staff,” he says.

He and his partners tapped Afghan NGO staff to some extent, and also looked at Afghans working for UN agencies, although by and large such staff already commanded salaries too expensive for the fledgling bank. In the end AIB found suitable, English speaking people, who had some experience in the financial sector or in the service industry.

For front office staff, however, AIB had to look mainly abroad. Positions such as head of corporate banking or risk management are very specific jobs found only in a stable banking environment, not in a country emerging from 25 years of war and misrule. AIB found suitable candidates in Pakistan, including Pashto speakers who could blend in well, and who were relatively affordable.

The next step was finding clients. Again, unlike other foreign banks, AIB could not tap a previously established clientele. “Most of the other banks who served international and local clients active in Afghanistan, but operating out of Pakistan throughout the troublesome era, merely shifted these customers to their newly opened operations in Kabul. So they had a clientele already.”

For its lending portfolio, AIB had initially some help from the United States Agency for International Development, with a $2 million funding program used to finance the agriculture sector and plans for another line of credit to fund small- to medium-sized enterprises.

The bank has also developed its own lending portfolio. “You have to be careful which clients you are selecting,” says Mr. Haye, referring to a need to avoid those involved in the huge illicit drug trade in Afghanistan, and other areas.

But AIB has chosen economic sectors it feels are financially rewarding and that need support. Besides agribusiness, these include the health care, energy, telecommunications, natural resources, and construction materials sectors. In general AIB’s focus is on import-substitution and export enhancing businesses.

Mr. Haye adds that the marble industry is developing, while printing also holds promise. “They need a lot of books here and these currently have to be printed in India or elsewhere.”

In an effort to promote the banking sector as a whole, AIB took the initiative in September 2004 to establish the Afghanistan Banks Association. The goal was twofold: to create awareness with the public of the resurrection of a professional, transparent, and customer-oriented banking environment as well as to organize a formal platform to discuss important issues with Da Afghanistan Bank (the central bank of Afghanistan) in its efforts to regulate the financial sector. Presently 13 banks have joined the association.

Looking to the future, Mr. Haye says investment in Afghanistan is increasing. But the big investors are waiting to see what the government will do, particularly in areas of taxation. It’s very important, he says, that the government strikes the right balance in solving its need for more revenue, on the one hand, and encouraging investment, on the other. Everyone is also waiting to see what the recent parliamentary elections will mean for the future, and how or to what extent security improves throughout the country.

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