Building creditHow to survive as a bank in Afghanistan

ECONOMISTS think of the opportunity cost of money as one reason to hold a bank deposit: rather than skulk under a mattress, cash could earn interest. In volatile, war-torn Afghanistan, neither option appeals. Money has to be kept secure somehow, but a bad bank might make off with its depositors’ money. In 2010 Kabul Bank collapsed after a spree of insider loans to shareholders, including a brother of the then president. A central-bank bail-out cost nearly 7% of GDP. Much of the nearly $1bn stolen has not been recovered.

A bank that customers trust, though, is in a strong position. So Afghanistan International Bank (AIB) does not pay any interest on its deposits, says Anthony Barned, its British chief executive. AIB was set up by the Asian Development Bank and private investors in 2004, and is the largest private bank in Afghanistan, holding $790m in deposits, around one-fifth of the country’s deposit base. It is also the most profitable.

As the only private institution with a dollar-clearing facility with big international banks, AIB is the main banker for Afghanistan’s commodity importers. Other customers include charities, embassies and the American army. In order to keep their business, AIB must maintain its clearing relationships with two foreign banks, Standard Chartered and Commerzbank, by adhering strictly to international anti-fraud and anti-money-laundering rules. In a country with a thriving opium trade, that means laborious inspections of invoices and spot-checks of premises.

Lending is a small part of the business. Formal financial records are scanty, so it is hard to gauge creditworthiness, let alone to foreclose on a defaulter. The central bank, burnt by the Kabul Bank debacle, insists that borrowers put up collateral worth 120% of a loan. Lending is measly across the country’s 15 banks: last December it amounted to a paltry 3% of Afghanistan’s GDP (of less than $20bn), compared with banking-sector assets of 23% of GDP. The balance is held with the central bank, or invested in financial instruments.

But there is a lack of demand for credit too, particularly among large firms, says Mr Barned. They may be waiting for a calmer political climate: both presidential and parliamentary elections loom in the next couple of years; the Taliban insurgency grinds on. Customers may be ready to trust some banks: trusting politicians is a different matter.