Dispatch Afghanistan: the Taliban want to replace the conventional banking system with Islamic banking – JURIST

Law students and lawyers in Afghanistan file reports with JURIST on the situation there after the Taliban took over. Here, a JURIST staff correspondent in Kabul reports on recent changes to laws affecting Afghanistan’s banking and financial sector. For reasons of confidentiality and security, we retain the name of our correspondent. The text has only been slightly modified to respect the author’s voice.

The Taliban-run Central Bank of Afghanistan has established a committee to review and amend the Central Bank Act and the Banking Act of Afghanistan. According to the Central Bank, a committee of seven members is set up to study and propose amendments to the law on the Central Bank.

The committee should adjust the legal framework of the Central Bank with the Islamic banking system and eliminate the conventional banking system. The Central Bank Act is almost sixty years old and provides no basis for an Islamic banking system. Instead, the banking law provides mechanisms through which both Islamic and conventional systems can be implemented. Commercial banks have special windows for Islamic banking which are regulated by the regulatory framework issued by the Central Bank.

The banking sector has contributed to the economic development of Afghanistan over the past two decades and Islamic banking is by far one of the fastest growing sectors not only in Afghanistan but in the Middle East market. In Islamic banking, there are no loans and credits to finance trade, industry and agriculture, except Qard Hassana and where profit and loss sharing is not possible, such as interest-free loans provided by the federal government to provincial governments for their development needs.

In 2018, the Central Bank licensed the first Islamic bank: the Islamic Bank of Afghanistan, which previously operated under the conventional banking system. This bank applies the principles of interest-free Islamic finance in all its operations. Since then, no other bank has been licensed to operate a full-fledged Islamic banking system in the country.

The committee responsible for amending the Banking Law and the Central Banking Law lacks the expertise to assess the current regulatory framework and propose Islamic banking regulation. No member of the committee has expertise in the Islamic banking sector and none has worked in the sector.

In addition to the above challenges, the process of legislative documents is unclear so far. Since the Taliban took power in August last year, no laws or regulations have been processed and published in the country’s official gazette. It is unclear where the committee’s proposal will go to be approved.

In addition, the Central Bank has ordered all commercial banks to convert to Islamic banking. Commercial banks are responsible for providing the Central Bank with their plan explaining the timing and changes needed to convert to Islamic banking systems. Afghanistan’s first microfinance bank has already started the conversion and recruited companies to restructure the bank to become an Islamic banking system.

One of the major challenges that the country’s financial system would face is that the Central Bank as well as the Taliban-led government have to deal with the lack of capacity to enforce Islamic banking in the country. The Central Bank has always spoken of the challenge not only in Islamic banking but also in conventional banking.

The Central Bank now has its special section for the propagation of virtue and the prevention of vice. According to some people in the Central Bank, the officials of this section ask the central bank employees to keep their beards, pray five times a day and even told some that if they do not comply with the above, there would be no wages for them.

About Ruben V. Albin

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