|Afghanistan's Booming Economy|
The Wall Street Journal
By Ann Marlowe
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KABUL -- The recent spate of violence shouldn't be allowed to detract from the real story here: Afghanistan's booming economy. Frightened by exaggerated scare stories, American and other Western companies are missing out on lucrative investment opportunities grasped by ostensibly less sophisticated Afghan and regional players.
There's no shortage of profit to be made in an economy that grew 14% in the 12 months to March 21, and is expected to expand by a similar amount in the current financial year. In Kabul alone the number of cars and taxis has increased by one-third since last year to 400,000, up from fewer than 1,000 under the Taliban. Large sections of the city boast three- and four-storey buildings where mud brick houses stood only a few years ago, and twin 17- and 20-storey towers are currently under construction in Herat.
Telecom was one of the first big success stories. U.S. companies stood by as Afghanistan's first four mobile-phone licenses were auctioned off, starting in January 2003. The Afghan-American and regional investors who got licenses have profited as the number of private mobile-phone users rocketed from zero to 1.5 million over the last five years.
Now finance and banking is taking off -- and, once again, Western companies are missing out. First in the door were institutions from neighboring countries. Banks from Pakistan, Iran, India and the United Arab Emirates started opening branches in October 2003. Then, in 2004, the first two local banks opened up -- Kabul Bank and Afghanistan International Bank (AIB). A third, Azizi, joined them in June this year.
By next March, 16 banks are expected to be operating in Afghanistan.
What these investors see is a wide-open banking market. When the Taliban fell in 2001, there were only a handful of moribund, government-owned banks that neither made loans nor collected deposits. "When I came here in November 2002 we didn't have a unified currency in the country.
When we started working at the Treasury Department of Da Afghanistan Bank [Afghanistan's central bank] in January 2004, there was one computer and no phones," said Martin Dinning, a British banker leading the USAID team of consultants here.
Even today, less than one-third of Afghan businesses have a bank account. Fewer than 1% take out bank loans. Most Afghans prefer to use the traditional hawala system, an informal network of money-transfer businesses, to move money and take out loans. But since the hawalas typically charge interest rates of around 20%, there is plenty of interest-rate margin for anyone willing to undercut them. Nor are bank loans the only opportunity waiting to be grasped in Afghanistan's financial sector: mortgages, car loans, credit bureaus, private insurance and credit cards are all still nonexistent.
Kabul Bank is now the biggest in Afghanistan, though at $206 million in deposits and $122 million in loans it's miniscule by American standards. It's added $45 million of those deposits since April, when it introduced its Shariah-law compliant accounts, which respect Islam's prohibition on interest, rewarding depositors with a monthly lottery instead. AIB is even smaller, with $32.5 million in deposits and $28 million in loans; it has focused on its ATM and internet banking networks, serving top-drawer customers. Both are generating outsized profits: Kabul Bank has a return on shareholder's equity of 23.95%, and AIB boasts 21.4%.
The interest-rate spread is fat -- Kabul Bank pays customers 5% on savings accounts and 6% on term deposits, but claims its loans yield 10.4%. Competitors say the real figure may be as high as 20% for less creditworthy borrowers.
Newcomer Azizi Bank is, like Kabul Bank, aiming its services at the local consumer. In two and a half months, it's opened 26,000 Shariah-compliant accounts. Azizi's president, Deepak Shrivastava, previously with the Punjab National Bank of India branch in Kabul, estimates that by the end of their first year they may have as many as 150,000 accounts.
Bear in mind that these banks' growth has been achieved despite considerable handicaps. There aren't many places for banks to invest deposits; the only locally-denominated financial instruments are the 28- and 56-day notes auctioned by Da Afghanistan Bank. Every week, a couple of hundred million afghanis' worth of notes are sold, with bidders outnumbering notes by one-third. There's also no deposit insurance in Afghanistan. Loan growth has been stymied by the absence of a secured transactions law; Da Afghanistan Bank is working on a draft, but it's not likely to reach parliament until next March.
The biggest carrot in Afghan banking right now is the right to handle government employee salaries. As a way of reducing the informality of the Afghan economy, 360,000 of an estimated 410,000 government employees will eventually be paid by direct deposit. The local banks are all bidding for this prize. The aim is not only to facilitate tax collection, as more Afghans earn their way into taxable brackets (which currently begin at $250 a month), but to eliminate "ghost employees" on the payroll of government ministries.
The potential market for banking services is far larger than the payroll accounts. A study done by AIB and mobile-phone provider Roshan estimates a potential market of at least 421,000 Afghans. Even this is probably an underestimate, as it only counts the top 10% of Afghan male wage earners, omitting women, small businessmen and farmers.
Local and regional businessmen have been quick to see the huge opportunities presented by Afghanistan's booming economy. Kabul Bank, Azizi Bank and AIB all have Afghan or Afghan-diaspora ownership. Others should take their cue from these insiders. If only American and other Western investors could see past the doomsayers, they too could play a part in the Afghan economic success story. It is this, together with decisive military responses to the insurgents and drug traffickers, that will ensure Afghanistan becomes a stable member of the community of nations.
Ms. Marlowe has been visiting Afghanistan since 2002. Her memoir,"The Book of Trouble" (Harcourt 2006) is partially set there.