Building Peace and Connectivity through Research and Dialogue

Afghanistan Financial Sector: Uncertainty and Challenges

Written by: Syed Ishaq Alavi*

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Afghanistan’s banking sector remains highly stressed amid a crippling liquidity crisis and a deteriorating economic condition. The protracted systemic bank run, sparked by panic around the government’s fall in August 2021, is partially addressed by the Central Bank of Afghanistan/Da Afghanistan Bank (DAB) imposed daily withdrawal limits on deposits. The exchange rate has recently stabilized after experiencing severe fluctuations over the past five months. High dollarization, illiquidity, and extended closure of banks and other financial institutions during the five months served as speed bumps stalling a spectacular currency crash. Despite that, the exchange rate tumbled in mid-December to record lows not seen since the currency reform two decades ago, leading to a sharp increase in the prices of essential goods and pushing Consumer Price Index (CPI) inflation to a double-digits territory.

In the meantime, the central bank’s lack of access to the country’s international reserves continues to breed a system-wide liquidity crunch in a cash-hungry dollarized economy. The recent limited dollar injections[1] by UN agencies, although helpful, seem to be too little and even too late. DAB’s unannounced move to overtake control of the operations in one stressed bank was an important step to contain growing financial instability. This unfolding instability was also reflected in the formal banking sector’s increasing loss of ground to an informal, mostly unregulated, and sophisticated Hawala system, which, if left unleashed, is poised to reclaim the unrivaled relevance it enjoyed during the 1990s.

The outlook for the financial sectors’ return to normalcy remains clouded by continued uncertainties. In addition, against the backdrop of a new economic and political landscape, Afghanistan remains highly exposed to a potential Financial Action Task Force (FATF) classification and a complete loss of correspondent banking relationships. This, combined with the international political division on how to deal with the developments in Afghanistan, may temporarily postpone the process, too.

In the meantime, despite recently announced flexibility by the United States and the United Nations on the targeted flow of funds to Afghanistan, risk-averse businesses and financial institutions remain reluctant to resume businesses in and with Afghanistan. The potential risks of getting penalized for inadvertent violation of sanctions outweigh the limited and low-scale profit opportunities. This condition has already adversely impacted the flows related to trade accounts and the repayment of commercial bank claims on DAB. It will also complicate the prospect of printing new banknotes, the delivery of previously contracted notes, and maintaining the accounting and payments systems of the central bank and those of state-owned commercial banks. It may even affect the country’s ability to service its debts to bilateral or multilateral creditors.

The banking sector’s challenges are numerous and difficult to resolve. In this update*, the focus is on critical challenges and major recent developments in the banking system. It will conclude with a few key recommendations to improve the condition.


Lingering legal uncertainty

Afghanistan’s institutions are in a de facto legal vacuum. Currently, the lack of clarity on the country’s constitution and the de facto authorities’ conflicting statements have further fueled the confusion about the financial system as well. In September, the acting Minister of Justice indicated that they intend to adopt parts of 1964’s Monarchy Constitution temporarily[2]. In sharp contrast, the same official declared, “The Book of Allah, the Sunnah of the Prophet, and for issues related to the Islamic Jurisprudential Inferences (Ijtihadi), the Hanafi jurisprudence is our constitution.” He adds that “, from the perspective of Islamic Jurisprudence and law, we are rich; We do not want to rely on the laws which are adopted from foreign countries’ laws and are in conflict with Islamic Sharia.”[3]

The banking system is also affected by this legal uncertainty. The central bank and banking law of Afghanistan and their dependent regulations are based on the 2004 Constitution. In the meantime, there are serious observations about interest-based transactions which are also viewed as non-Islamic. Based on a decision by the Taliban interim government (TIG), a group of experts and religious scholars at the Afghanistan Science Academy is assigned to examine the elimination of the usury (interest) based system and work towards proposing an Islamic economic system.[4] Also, in November, DAB had assigned an internal committee to review the banking sectors’ legal framework and circulars in light of Sharia.[5]

Because of this legal limbo, the fate of several DAB transactions with commercial banks involving interest has reportedly remained undecided. This includes paying interest on commercial banks’ investment in the DAB capital notes. Capital notes were a monetary policy tool designed to absorb excess liquidity from the market. Originally, the capital notes aimed to attract excess liquidity from the banking and non-banking systems through the secondary market. However, due to interest considerations, the instrument did not get traction with the money service providers. For the commercial banks, capital notes were a risk-free, safe investment, and at times, had a good return.

In addition to capital notes, DAB introduced an interest-free and sharia-compliant instrument called al-Wadia in May 2021. This instrument aimed to absorb excess liquidity mainly from the Islamic Bank and Islamic banking windows of commercial banks.


Uncertainty about the central banks authority and autonomy

According to DAB law, the Supreme Council (SC) of Da Afghanistan Bank is the highest decision-making authority with the power to adopt the principal policies of Da Afghanistan Bank, including monetary, exchange rate, payment, and supervision. DAB law requires quarterly meetings of the DAB SC. Since Mid-August, there is no report of any formal meeting or probably even contacts between the new management and the SC members.

Based on open-source media reports, the economic commission seems to be the main decision-making body on economic and financial issues. This is evidenced by readouts of the economic commission meetings, including the meeting on January 16, 2022, discussing the crisis in a stressed private Bank[6] and earlier on the exchange rate during the current exchange rate turbulence. This situation, if continued, could undermine the principle of confidentiality in the banking system and the central bank’s autonomy, enshrined in the 2004 Constitution and the DAB law. The Central Bank had its budget independent of the central government’s budget in line with this autonomy. As a counterbalance to this budgetary independence, DAB management was required to submit to Parliament and publish specific reports regularly to ensure the principles of accountability and transparency. In the absence of a parliament, this check and balance mechanism is disrupted, and DAB management is apparently left expected to report to the cabinet or the Economic Commission. The cabinet’s influence can also be inferred from the leaked pay scale approved by the Taliban Cabinet which also includes the pay scale for DAB management and staff[7].


Uncertainty about the central banks primary objectives 

Da Afghanistan Bank’s primary objective is to preserve domestic price stability. Since mid-August 2021, the sharp decline in value of Afghani has been driving prices of essential goods to new spikes. Given the economy’s high dollarization, the pass-through from exchange rate movement to commodity prices is immediate and even synchronous, although the collapse of aggregate demand, contraction of money circulation due to shortsighted aggressive sterilization before August, and halt in government spending helped contain the inflationary pressures. Specifically, the contraction of housing, education, telecommunication, and clothing items in the non-food basket has partially offset the spike in the food items index. This, in turn, has partially offset food inflation. Despite that headline, the CPI index increased to about 13 percent last December.[8]

Currently, the central bank cannot use traditional monetary instruments to fulfill its primary objective of domestic price stability. The main policy tool was the foreign exchange market operation, which was implemented in cash dollar auctions two to three times a week. Due to the US freeze on Afghanistan’s foreign assets, DAB has limited USD banknotes in its vaults. The only time DAB used this instrument was in its mid-November Auction when it announced a sale of 10 million dollars and awarded one-fourth of the announced amount.

The second monetary policy tool is DAB Capital Notes which currently faces demand and supply constraints. First, there is no demand for it due to the liquidity crunch, prompting some commercial banks to cancel their investment prematurely to respond to the run. On the supply side, the central bank also seems to be reluctant to engage in interest-based transactions. It’s expected that with additional depreciation of the currency, winter effects, and the inflationary pressure from a recently approved[9] supplementary (prorated) budget of the equivalent of half a billion USD, the CPI inflation will continue to increase going forward.


Uncertainty about the exchange rate regime and policy

Afghanistan’s official exchange rate regime is a managed floating regime. Under this regime, the value of a currency against other currencies was determined by market forces of supply and demand. However, the central bank intervened to smoothen excessive exchange rate fluctuations. Da Afghanistan Bank’s bi-weekly auctions, which used to be the main monetary policy tool, also served as an instrument of exchange rate stability. Now the central bank is facing significant uncertainties in this regard. First, the central bank has to decide on its exchange rate regime as it does not have the instruments to maintain a managed float anymore. The alternative is to let the exchange rate go free float which has been the undeclared practice so far. The excessive fluctuation has been partly contained by a limited supply of USD by the Afghanistan International Bank, but mainly due to the cash crunch. The problem is that the market appears to have become very thin and highly elastic. This is visible in the markets’ large movements around mid-December when in addition to rumors about the collapse of private Bank, a relatively large demand by Da Afghan Breshna, the electricity distribution company, sent a tremor to the exchange market, leading to unprecedented depreciation of Afghani. Over the past three years, Breshna used to buy USD from the central bank to pay for imported electricity.

Recently, the economic commission has decided to ban Bolli, the dominant type of auction in Kabul’s leading foreign exchange (FX) market.[10] The repercussions of this decision are yet to be seen. This, along with the ban on foreign currencies in the transactions, adds to additional panics and uncertainty. A new limit has been imposed on the amount of foreign currency cash outflow (amount allowed to be carried by travelers). In this light, the country is moving toward capital control, given that the banks already have limited capacity to process non- trade-related outward payments.

Additionally, absent appropriate exchange rate policy instruments, there seems to be a tendency towards enforcing non-market-based measures to contain fluctuations. The recent crackdown on money service providers and foreign exchange dealers for alleged smuggling of USD banknotes from Afghanistan to Pakistan[11] and reported ban on posting live exchange rate quotes can create a lot of anxiety in the market and may prove counterproductive in the medium to long term.

As far as the central bank’s mandate of reserve management is concerned, DAB’s access to a large part of Afghanistan’s international reserves seems highly unlikely in the near future. At the same time, the DAB’s policy about what is expected to be preserved as the country’s inter-generational equity and as a cushion against external (i.e., the balance of payment) shocks remains unclear. What is clear is that the interim government is facing a significant budget deficit in an increasingly cash-hungry, low revenue economy, which may tempt the de facto authorities to draw down on the country’s international reserves if and once they are unfrozen.


A turbulent time for the financial sector

Afghanistan’s financial sector is facing dire challenges. The challenges include changes in the regulatory environment and the shift in the business landscape. In addition to the regulatory environment, the central bank’s capacity, which was already hit hard due to disastrous policies of previous DAB management, remains largely constrained. DAB’s recent decision to restore some qualified and competent staff who were sidelined during the former management of the Bank is a positive step but is insufficient given that female employees are currently not allowed to work.


Recent developments in the commercial banks

Afghanistan’s commercial banks remain highly stressed as many of the banks face a challenging condition dealing with the systematic run.[12] Most of the banks now virtually operate as narrow banks or even as de-facto receivership offices, providing limited withdrawal services only, and even that is subject to the availability of cash. The expected resumption of limited ATM services[13] does not seem to alleviate the burden on the branches.

Apart from limited remittances, deposits by humanitarian agencies, and domestic transfers, there is hardly any incoming new flow to the banks despite exempting new promises from the limits on withdrawals. Banks are reportedly discouraged from opening new accounts to prevent multiple weekly withdrawals by the same depositors. Banks have resorted to cost-reducing measures to lower the cost of operation as they have lost most of their interest and non-interest income. Unsurprisingly, despite these measures, most banks continue to incur losses. With the central bank and the government unable to inject liquidity or bailout, many weak banks are destined to an inevitable uncertain future. Below is a brief picture of major financial indicators, including assets, liabilities, and liquidity in the sector:


a. Assets and liabilities

With the continued systemic run-on banks, major components of the bank’s total asset portfolio, including claims on DAB, have been declining. There is a significant deterioration of loan quality. With the highest concentration of bank credit in the trade, service, industry, and construction sectors most affected by the collapse of the government, there is a significant increase in nonperforming loans. All categories of loans have been adversely affected. However, given the situation, a de facto moratorium on (freezing of) enforcement of many regulatory requirements related to loan review, classifications, and provisioning has been put in place. At the same time, given the unprecedented recession in the property market, liquidation and realization of collateral are further complicated.

The total deposits of the banking sector, which exceeded 95 percent of total liabilities before August, have been declining. Continued withdrawals drive the decline by panicking depositors with almost no incoming deposits due to the de-facto ban on opening new accounts. The weekly withdrawal limits that remain in place have, in a way, forcefully flattened the demand curve for withdrawal. This may have temporarily stabilized the fragile situation, but the underlying causes of the crises continue to remain unaddressed. In the meantime, these weekly limits had reportedly created excessive rent-seeking opportunities, which prompted DAB to minimize these opportunities.

As indicated earlier, the asset-liability gap in several weak banks reportedly continues to widen as they incur system maintenance and operation costs despite losing most of their income. With the value of liabilities in some banks exceeding the value of their assets, they are moving towards becoming non-going concern entities, legally requiring the central bank to initiate receivership proceedings against concerned banks. The central bank has already taken steps to overtake the control of the operation in one private Bank. The question now is how to resolve this bank. While the conservatorship option seems unlikely, putting the troubled bank under receivership comes with challenges, including paying depositors’ claims and generating moral hazard risks.


b. Liquidity crisis

The central bank’s failure to meet commercial banks’ liquidity demand even before mid-August- was the main trigger for the current liquidity crisis in the banking sector, which peaked in the aftermath of the fall of Kabul, compounded by the total meltdown of the depositors’ confidence. The problem began after DAB, unlike in the past, failed to receive USD banknote shipments from the Federal Reserve Bank. Despite this, DAB continued its cash USD sales in its biweekly auctions, drawing on commercial banks’ funds held in their current accounts with DAB. As the demand for liquidity built up, DAB imposed weekly cash withdrawal limits.

With the fall of Kabul, the United States froze Da Afghanistan Bank’s accounts, affecting, among other things, DAB’s ability to transfer funds to commercial banks’ correspondent bank accounts. The ambiguity around the scope of sanctions in the first few weeks affected the flow of remittances and commercial banks’ ability to process import-related payments in the context of a crippling humanitarian crisis. Later, the US Treasury issued a series of General Licenses, authorizing the flow of funds related to humanitarian and several other civil businesses.[14]


c. High-risk jurisdiction

The outlook for Afghanistan’s anti-money laundering and counter-terrorist financing regime remains complicated. The Financial Action Task Force (FATF), the global watchdog and standard-setter on money laundering and terrorist financing, expressed its concern about Afghanistan’s current and evolving AML/CFT risk environment. At the same time, the Egmont Group disconnected the Financial Transactions and Reports Analysis Center of Afghanistan (FinTRACA) from the Egmont Secure Web (ESW) immediately after the Taliban’s takeover of Kabul. The Asia/Pacific Group on Money Laundering has also reportedly stopped formal contacts with the Center. The significant trust deficit between the interim government and the international community will continue to overshadow future relations with these multilateral agencies. Against this backdrop, Afghanistan is vulnerable to a potential FATF classification which means that the country faces a potential risk to be added to the list of high-risk jurisdictions subject to call for action, known as a blacklist. Once on the blocklist, Afghanistan will be declared and treated as a threat to the integrity of the international financial system.

Consequently, the entire banking and non-banking financial sector will lose all sorts of correspondent banking relationships. This will significantly disrupt financial services and cross-border flows, including flows related to import payments and remittances. Unless there is a dramatic change in the political and regulatory landscape, it will take several years of genuine reforms and concerted efforts to exit from the list and restore relations with the international financial system.


Collapsing banks and Afghanistans rescue and resolution capacity

Constrained by its severe shortage of US dollars, DAB appears to be little more than a semi- insolvent central bank, unable to repay commercial banks’ foreign currency claims held in the banks’ current accounts or for reserve requirements with Da Afghanistan Bank. Similarly, as the risks of financial instability loom large, DAB cannot provide a lender of last resort support or help bail out a highly stressed and largely illiquid banking sector. Closing the potentially troubled banks without covering the depositors would complicate the situation in the other banks and might trigger a complete meltdown. In the meantime, printing new banknotes, which was halted on August 15, looks very unlikely in the near future, and it is not clear whether the General Licenses issued by the US would cover it. Growing complaints[15] about the circulation of old and almost unfit banknotes indicate DAB’s inability to replace unfit banknotes with new ones.


The rise of the Hawala system

During the past two decades, Afghanistan made notable efforts, albeit with limited success, to expand access to formal financial services and bring the informal Hawala system under its regulatory perimeter. As a result, major money service providers and FX dealers in urban centers were required to operate under central bank licenses and provide regular reports, including large and suspicious transac03/01/2022tions. The overall strategy was to consolidate money service providers into a few fully regulated institutions with corporate licenses issued by Da Afghanistan Bank. However, with the recent developments casting doubt on the very survival of some of the commercial banks, there is a dramatic shift in the financial market landscape in favor of money service providers and exchange dealers. Commercial banks continue to downsize and close branch after branch, greater opportunities are created for the hawala system to expand and fill the vacuum created by the commercial banks’ retreat. Reports from within Sarai Shazada, Afghanistan’s biggest foreign exchange market, suggest the activity within the center and the whole Hawala business across the country is at record levels, indicating that the Hawala system is about to reclaim the unrivaled dominance and importance it enjoyed in the 1990s.

However, there are also indications that DAB will pursue the consolidation strategy. If implemented, this would be a highly ambitious but essential goal that the central bank in the republic era pursued with limited success. In the meantime, this will be a good demonstration of DAB’s decisiveness and effectiveness, given that the uncontrolled Hawala system is something that former large donors and many of Afghanistan’s neighbors were not happy about.



The liquidity shortage, enormous income shock, and lingering political uncertainties drive the systemic bank run. The national currency has seen significant depreciation and remains under downward pressure. Limited USD cash inflows by aid agencies – albeit highly helpful- is too little to address the enormous liquidity, balance of payment, and confidence shocks. The institutions do not have the needed resources and capacity to address these multiple shocks. This situation warrants that the international community, in parallel to delivering urgent humanitarian assistance, work with the Taliban interim government on many important measures focused on improving the condition in the financial sector. However, the following key measures should be prioritized to prevent further deterioration of the situation in the sector.


  1. As the financial sector regulator and policy setter, Da Afghanistan Bank is currently facing several uncertainties related to legal, reputational, and operational challenges. This affects the financial sector adversely and complicates Afghanistan’s economic relations with the world. To overcome these challenges, Da Afghanistan Bank’s autonomy as a policy-making and regulatory authority should be fully restored and respected. The institution’s policies and operations should be only economic-driven and focused on its primary objective and mandates. To achieve this, DAB needs independent, competent, and professional boards (Supreme Council and management). Both the board should be free of any influence- including the influence of commercial entities- and should meet the professional competence and criteria outlined in the DAB law. This would help restore DAB’s credibility and operational independence of Da Afghanistan Bank.
  2. Parts of Afghanistan’s reserves need to be unfrozen immediately and paid to commercial banks to cover the remaining commercial banks’ USD denominated claims on DAB. Parts of the released fund should be physically deposited to the commercial banks in Kabul to help address the lingering liquidity crisis. The US also seems willing to remove parts of Afghanistan’s international reserves if these conditions are met. If DAB’s independence is secured, the fund can be channeled through the central bank. Otherwise, a temporary arrangement is needed to facilitate the transfer of released funds. As soon as these deposits are made available to the commercial banks, the withdrawal limits can be increased or even relaxed.
  3. The liquidity crisis will not be fully managed even if banks’ claims on DAB are repaid. The growing asset-liability gap may render many of the banks insolvent. This poses a severe financial instability risk and warrants urgent actions. An independent central bank should revamp the strategy on dealing with troubled and highly stressed weak banks. Afghanistan’s financial stability committee should be strengthened and urgently approve a new financial crisis preparedness and resolution plan.


You can access the full report in pdf here.


About the author

The author has worked at the Da Afghanistan Bank/The Central Bank of Afghanistan as Director-General of the Monetary Policy Department from February 2013 to June 2018 and Policy Advisor to the Bank governor from late 2010 to February 2013. From June 2018 to August 2020, he served as Advisor to the Executive Director of the International Monetary Fund for Afghanistan, Algeria, Ghana, Iran, Libya, Morocco, Pakistan, and Tunisia.


* This is an abridged version of the second update in a series of reports on Afghanistan’s financial sector after the government’s fall on August 15, 2021. This report was prepared in January and has not been updated to reflect every recent development.  Opinions expressed in the paper are those of the author. They do not necessarily reflect HAS’s policy, board, or management’s position.

This paper was made possible by the support of the Sasakawa Peace Foundation.


[1] “Fourth USD Shipment Reached Afghanistan,” Da Afghanistan Bank. Dec. 15, 2021.

[2] “وزیر عدلیه طالبان از اجرای قانون اساسی زمان ظاهر شاه خبر داد” BBC. Sep. 28, 2021.

[3] Message from the Acting Minister of Justice, Ministry of Justice.

[4] Inamullah Samangani, Deputy Spokesperson of the TIG, Jan. 12, 2022. Twitter.

[5] “جلسۀ به ریاست معاون اول د افغانستان بانک تدویر گردید” Da Afghanistan Bank.

[6] ARG Palace – Official Twitter, account,

[7] Hasib Bahesh, کارشیوه جدید معاشات حکومت سرپرست طالبان برای کارمندان دولتی,  8AM Daily:

[8] Based on CPI data for December 2021 received from the Afghanistan National Statics and Information Authorities.

[9] Inamullah Samangani, Deputy Spokesperson of the TIG, Jan. 12, 2022. Twitter.

[10] “طالبان «بولی» در بازارهای ارز را ممنوع کردند,” Etilaat Roz:

[11] Firoz Sidiqy, “طالبان ۲۱ نفر را به اتهام قاچاق ۱۸ میلیون دالر به پاکستان از سرای شهزاده‌ی کابل بازداشت کرده‌اند” Khaama Press, Dec. 17, 2021.

[12] “مشکلات بانک‌ها حل نشد” 8AM,

[13] “استفاده از ماشین های اتومات صرافی (ATM) عملاً آغاز می گردد” Da Afghanistan Bank.استفاده-از-ماشین-های-اتومات-صرافی-atm-عملاً-آغاز-می-گردد

[14] US Department of Treasury, Sep. 24, 2021.

[15]Farshad Daryush, DECEMBER 11, 2021, Tolonews:

Worn-Out Banknotes One More Difficulty in Afghan Economic Crisis | TOLOnews,