Afghanistan's Booming Economy...

By Ann Marlowe
1061 words
19 September 2006
The Wall Street Journal Asia

There's no shortage of profit to be made in an economy that grew 14%
in the 12 months to March 21, and is expected to expand by a similar
amount in the current financial year. In Kabul alone the number of
cars and taxis has increased by one-third since last year to 400,000,
up from fewer than 1,000 under the Taliban. Large sections of the city
boast
three- and four-storey buildings where mud brick houses stood only a
few years ago, and twin 17- and 20-storey towers are currently under
construction in Herat.

Telecom was one of the first big success stories. U.S. companies stood
by as Afghanistan's first four mobile-phone licenses were auctioned
off, starting in January 2003. The Afghan-American and regional
investors who got licenses have profited as the number of private
mobile-phone users rocketed from zero to 1.5 million over the last
five years.

Now finance and banking is taking off -- and, once again, Western
companies are missing out. First in the door were institutions from
neighboring countries. Banks from Pakistan, Iran, India and the United
Arab Emirates started opening branches in October 2003. Then, in 2004,
the first two local banks opened up -- Kabul Bank and Afghanistan
International Bank (AIB). A third, Azizi, joined them in June this
year.
By next March, 16 banks are expected to be operating in Afghanistan.

What these investors see is a wide-open banking market. When the
Taliban fell in 2001, there were only a handful of moribund,
government-owned banks that neither made loans nor collected deposits.
"When I came here in November 2002 we didn't have a unified currency
in the country. When we started working at the Treasury Department of
Da Afghanistan Bank [Afghanistan's central bank] in January 2004,
there was one computer and no phones," said Martin Dinning, a British
banker leading the USAID team of consultants here.

Even today, less than one-third of Afghan businesses have a bank
account. Fewer than 1% take out bank loans. Most Afghans prefer to use
the traditional hawala system, an informal network of money-transfer
businesses, to move money and take out loans. But since the hawalas
typically charge interest rates of around 20%, there is plenty of
interest-rate margin for anyone willing to undercut them. Nor are bank
loans the only opportunity waiting to be grasped in Afghanistan's
financial sector: mortgages, car loans, credit bureaus, private
insurance and credit cards are all still nonexistent.

Kabul Bank is now the biggest in Afghanistan, though at $206 million
in deposits and $122 million in loans it's miniscule by American
standards.
It's added $45 million of those deposits since April, when it
introduced its Shariah-law compliant accounts, which respect Islam's
prohibition on interest, rewarding depositors with a monthly lottery
instead. AIB is even smaller, with $32.5 million in deposits and $28
million in loans; it has focused on its ATM and internet banking
networks, serving top-drawer customers. Both are generating outsized
profits: Kabul Bank has a return on shareholder's equity of 23.95%,
and AIB boasts 21.4%.

The interest-rate spread is fat -- Kabul Bank pays customers 5% on
savings accounts and 6% on term deposits, but claims its loans yield
10.4%. Competitors say the real figure may be as high as 20% for less
creditworthy borrowers.

Newcomer Azizi Bank is, like Kabul Bank, aiming its services at the
local consumer. In two and a half months, it's opened 26,000
Shariah-compliant accounts. Azizi's president, Deepak Shrivastava,
previously with the Punjab National Bank of India branch in Kabul,
estimates that by the end of their first year they may have as many as
150,000 accounts.

Bear in mind that these banks' growth has been achieved despite
considerable handicaps. There aren't many places for banks to invest
deposits; the only locally-denominated financial instruments are the
28-
and 56-day notes auctioned by Da Afghanistan Bank. Every week, a
couple of hundred million afghanis' worth of notes are sold, with
bidders outnumbering notes by one-third. There's also no deposit
insurance in Afghanistan. Loan growth has been stymied by the absence
of a secured transactions law; Da Afghanistan Bank is working on a
draft, but it's not likely to reach parliament until next March.

The biggest carrot in Afghan banking right now is the right to handle
government employee salaries. As a way of reducing the informality of
the Afghan economy, 360,000 of an estimated 410,000 government
employees will eventually be paid by direct deposit. The local banks
are all bidding for this prize. The aim is not only to facilitate tax
collection, as more Afghans earn their way into taxable brackets
(which currently begin at $250 a month), but to eliminate "ghost
employees" on the payroll of government ministries.

The potential market for banking services is far larger than the
payroll accounts. A study done by AIB and mobile-phone provider Roshan
estimates a potential market of at least 421,000 Afghans. Even this is
probably an underestimate, as it only counts the top 10% of Afghan
male wage earners, omitting women, small businessmen and farmers.

Local and regional businessmen have been quick to see the huge
opportunities presented by Afghanistan's booming economy. Kabul Bank,
Azizi Bank and AIB all have Afghan or Afghan-diaspora ownership.
Others should take their cue from these insiders. If only American and
other Western investors could see past the doomsayers, they too could
play a part in the Afghan economic success story. It is this, together
with decisive military responses to the insurgents and drug
traffickers, that will ensure Afghanistan becomes a stable member of
the community of nations.

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Ms. Marlowe has been visiting Afghanistan since 2002. Her memoir, "The
Book of Trouble" (Harcourt 2006) is partially set there.

(See related editorial: "And Its Security Problems . . ." -- WSJA
September 19, 2006)