Afghan Banking Sector Booms but Concerns Remain about

UNCLAS SECTION 01 OF 02 KABUL 000564 SENSITIVE SIPDIS E.O. 12598: N/A TAGS: EFIN EINV ECON AF SUBJECT: Afghan Banking Sector Booms but Concerns Remain about Systemic Health REF: KABUL 551 ¶1. (SBU) Summary: The Treasury Attache Office met with officials from six of the seventeen banks operating in Afghanistan in January to gather views on the health of the sector. These meetings were held with a broad range of formal financial institutions, including large (Kabul Bank, Azizi Bank, and Afghanistan International Bank), medium (Afghan United Bank),and small banks (Ghazanfar Bank),and one state-owned bank (Bank-e Millie). At each meeting, bank officials and discussed plans for expansion in 2010. However, each banker also noted concerns about the sector as a whole, including weak bank supervision, lack of a functioning banker's association, and ongoing rumors that the largest banks in Kabul are heavily exposed to the Dubai property market (NOTE: More detail on accusations of Kabul Bank and Azizi Bank's exposure to Dubai are reported reftel). Bankers also uniformly expressed frustration that U.S. economic sanctions on Iran have prevented them from financing legitimate trade, an issue Treasury is currently looking into. End Summary. Banks Booming in Afghanistan Amidst Growing Concerns -------------- -------------- ¶2. (SBU) The financial sector is Afghanistan's second largest service-based industry (behind only telecommunications) and an important driver of private investment and economic growth. The sector has grown rapidly since the end of Taliban rule. Today, 17 commercial banks operate in Afghanistan, with total assets of $3.0 billion (compared to assets of less than $300 million in 2004). The sector is a major employer of young people and women. ¶3. (SBU) Despite the financial sectors' rapid expansion, Afghan bankers and other observers have concerns about the fragility of specific banks and the sector as a whole. Every bank official spoken to cited weak banking supervision as the biggest threat to the financial sector, even though the Banking Supervision Department at Da Afghanistan Bank (DAB) - which is the Afghan Central Bank - has made significant improvements in regulation and supervision in recent years. According to bankers, DAB is unable to keep pace with the sector's growth because it lacks sufficient knowledge and staffing. For example, the Supervision Department has only four people covering anti-money laundering/combating of financing of terrorism (AML/CFT) issues for the entire Afghan financial sector. (Comment: USAID technical advisors are working with DAB's Banking Supervision Department to build capacity and Treasury has assigned an advisor to train DAB staff specifically on AML/CFT investigation.) ¶4. (SBU) Bank officials also cited the Afghanistan Banks Association's (ABA) ineffectiveness as an impediment to strengthening the financial sector. The ABA is intended to foster coordination among Afghan banks and present a unified voice in discussions with DAB. However, the ABA has been undermined by poor leadership and lack of trust among its members. Currently, Kabul Bank CEO Khalilullah Frozi is the Chair of the ABA, but he rarely attends board meetings and ABA members question his leadership and financial background. Frozi's lack of leadership and the mistrust between ABA group members has resulted in a dysfunctional organization that has tended to split apart on issues according to political and ethnic affiliations. Officials also noted that the ABA is hampered by a weak secretariat (a role currently handled by one person) and the absence of a legal advisory staff. (Comment: The Treasury Attache Office is working with interagency and international partners to establish a Financial Services Advisory Group (FSAG) to fill the coordination and information-sharing role needed in the Afghan financial sector. The FSAG will meet quarterly to identify emerging issues, hear from industry leaders, and develop strategies and recommendations to strengthen the formal financial sector and expand access to credit). ¶5. (SBU) Several bank officials lamented the lack of a private credit rating agency to rate borrowers' creditworthiness. The DAB recently launched the Credit Information Bureau (CIB) to help serve this function, however bankers noted that the CIB would need several years to collect sufficient data to fulfill this role. Other recent initiatives taken by DAB to strengthen the financial sector include initiating a Collateral Registry, establishing the Afghanistan Institute for Banking and Finance (AIBF) to improve the skills and knowledge of workers in the financial sector, and starting the Afghan Deposit Insurance Corporation (ADIC),which will cover deposits up to $2000. U.S. Sanctions Against Iran Hurt Afghan Banks and Commercial Traders -------------- ¶6. (SBU) Multiple Afghan bankers complained that U.S. sanctions against Iran prevent them from signing Letters of Credit with Afghans who trade with Iranian companies or ship/receive goods that transit through Iran, thereby undermining legitimate commerce. (Note: Afghanistan imported $200 million of merchandise imports from Iran in FY2008/09, representing 6% of Afghanistan's total imports. In addition, goods flowing between Western Afghanistan and the rest of KABUL 00000564 002 OF 002 the world often transit through the Iranian port, Bander Abbas). The Treasury Attache noted that U.S. sanctions against Iran, which are implemented by the Office of Foreign Asset Control (OFAC),were not intended to hurt Afghan commerce. The Attache Office has put in an information request with OFAC to discuss whether these unintended consequences can be minimized. Afghan Institutions Seek Correspondent Relationships with U.S. Banks -------------- ¶7. (SBU) Almost all of the officials we spoke to discussed their desire to establish a correspondent banking relationship with a major U.S. bank. Opening a correspondent account with a U.S. bank allows the 'corresponding' foreign bank to receive deposits, make payments on behalf of, and handle other financial transactions for that U.S. bank. Payments through correspondents are often executed through reciprocal accounts. This indirect relationship means that banks need to undertake significant due diligence and risk assessment before entering into a correspondent relationship due to the risk of money laundering and illicit financing. The U.S. government can make these assessments more or less arduous for Afghan banks by changing regulations - providing a useful carrot/stick to gain bankers' cooperation. EIKENBERRY