Afghan banking system on brink of collapse: UN

Afghanistan’s financial system is set to collapse within months as it reels from a worsening liquidity crunch and soaring bad debts, according to a new report from the United Nations for Development (UNDP) on November 22. “swift and decisive” action, warning that the economic cost of a collapse and the resulting social fallout would be “colossal”.

Afghans have faced a severe cash crunch since the Taliban’s takeover of Kabul in August, which led to international sanctions. The latter saw the country’s international reserves frozen and most foreign subsidies suspended. The cash shortage has forced the Taliban regime to cap weekly withdrawals from bank deposits.

Abdallah al Dardari, head of UNDP in Afghanistan, said the collapse of the financial system was slowing rapidly declining economic activity in the country and could undermine international aid efforts because “the bank is also one of the connectors most important in the country to the outside world.” “Without the banking sector, there is no humanitarian solution for Afghanistan,” he said in a statement. “Do we really want to see the Afghans completely isolated?

The banking system in “disarray”

Total banking system deposits in the country fell to 194 billion Afghans (1.8 billion euros, $2 billion) in September, from 268 billion Afghans at the end of 2020, according to the report. Deposits are expected to decline further to 165 billion Afghans by the end of 2021, down about 40% from last year. Bad debts also increased in what is a relatively small credit market. Non-performing loans soared to 57% in September from around 30% at the end of 2020.

The current crisis has prompted banks to stop granting new loans, making the situation worse, especially for small businesses. “In addition to the decline in economic activity, problems in the banking system will further reduce the probability of survival of MSMEs[microsmallandmediumenterprises)whichiscriticalfortheAfghaneconomyandpeople”saysthereportTheInternationalMonetaryFund(IMF)expectstheAfghaneconomytocontractbyupto30%thisyear(IMF)expectstheAfghaneconomytoshrinkbyupto30percentthisyear[micropetitesetmoyennesentreprises)cequiestessentielpourl’économieetlepeupleafghans”indiquelerapportLeFondsmonétaireinternational(FMI)s’attendàcequel’économieafghanesecontractejusqu’à30%cetteannée[MicroSmall&MediumEnterprises)probabilityofsurvivalwhichiscriticalfortheAfghaneconomyandpeople”thereportsaidTheInternationalMonetaryFund(IMF)expectstheAfghaneconomytoshrinkbyupto30percentthisyear

Risking two decades of progress

Afghanistan’s financial system, although still underdeveloped, has grown steadily since the ousting of the Taliban in 2001, when the banking sector virtually collapsed. The banking sector has 12 commercial lenders, including six private commercial banks, one private Islamic bank, three public banks and two branches of foreign banks. Private domestic banks accounted for around two-thirds of all banking sector assets at the end of 2020. The majority of the banks’ more than 400 branches are in the capital Kabul, Herat and Mazar-e-Sharif. The banking system is highly dependent on the dollar, with about 60% of bank deposits being made in foreign currencies.

As the Taliban ordered banks to reopen after weeks of closure following the Taliban victory, lenders are struggling to find enough cash to serve their customers as dollar inflows have stalled and Afghans fear hiding money. money for even worse times. Al Dardari said Reuters According to the news agency, of the 4 billion Afghan dollars in the economy, only about 500,000 dollars are in circulation. “The rest is sitting under the mattress or under the pillow because people are scared,” he said.

Prevent a collapse

Among the measures to prevent a collapse of the Afghan banking system, UNDP proposed a deposit insurance scheme, sufficient liquidity for the banking system to meet short- and medium-term needs, and credit guarantees as well as loan repayment options. “The longer the delay in fully restoring the financial and banking systems, the longer the recovery period, due to the lack of confidence in international markets,” the UNDP report said. “This erosion is difficult to repair and could take decades.”

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