Cablegate: Afghan Banking Sector Booms but Concerns Remain About

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DE RUEHBUL #0564/01 0460552
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R 150552Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 5596
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

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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

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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.

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