Afghan banking system ‘in disarray’ and close to collapse, warns UN

Afghans wait for hours to try to withdraw money, in front of a bank, in Kabul on Sunday, 15 August, 2021 after Taliban fighters entered the city. (Keystone/ AP Photo/Rahmat Gul)

The United Nations has called for urgent measures to prevent the collapse of Afghanistan’s ailing banking system amid a worsening liquidity crisis, falling deposits, and deteriorating conditions for the country’s credit-starved businesses. 

In a three-page situation report released on Monday, the UN Development Programme (UNDP) said the economic cost and social consequences of a banking system failure would be “colossal”.

Afghanistan’s financial and bank payment systems have been at a near-standstill since the Taliban took control of the country in August and international sanctions on the new regime came into force.

The United States has frozen some $9.4 billion of Afghan government reserves held in US banks and the World Bank, the International Monetary Fund, and many more have halted millions of dollars of financial support.

Transfer services have remained suspended and with money drying up, Afghanistan’s central bank has put a limit on the amount Afghans are allowed to withdraw, further heightening tensions in the country. In September, hundreds of Afghans took to the streets in Kabul to protest against the closure of banks. 

“Afghanistan’s financial and bank payment systems are in disarray,” the UNDP said in its report. “The bank-run problem must be resolved quickly to improve Afghanistan’s limited production capacity and prevent the banking system from collapsing.”

Banking crisis also a humanitarian crisis

Abdallah Al Dardari, UNDP resident representative in Afghanistan, warned that the dire financial situation was also preventing humanitarian organisations from being able to get aid into the country.  “Without the banking sector, there’s no humanitarian solution for Afghanistan,” he said.

A senior International Committee of the Red Cross (ICRC) official on Monday said he was “livid” that economic and banking sanctions were freezing millions of people across Afghanistan out of essential services needed to survive.

Unilateral sanctions are causing confusion among humanitarian organisations including the ICRC, who have been calling for clear carve-outs so that they can operate without fear of fines or prosecution.

“Sanctions on banking services are sending the economy into free-fall and holding up bilateral aid. Municipal workers, teachers, and health staff haven’t been paid in five months,” Dominik Stillhart, ICRC’s director of operations returning from a six-day visit to Afghanistan, said in a statement.

More than 22 million Afghans will face crisis or emergency levels of acute hunger between November and March 2022, according to the latest IPC report. “The desperation can be seen in the huge crowds lining up in front of banks at 5 a.m. in the hope that they can withdraw a little bit of cash,” Stillhart added.

Patching up the banking system

The UNDP recommends different ways of coming to the rescue, such as establishing a deposit insurance scheme for depositors as well as credit guarantees and loan repayment delay options for individuals and small businesses.

Coordination with international financial institutions with experience of the Afghan financial system would be critical in the process, the UNDP adds.

It also recommends that the UN system could play a role in contributing to gathering and verifying ongoing banking and financial system data.  With confidence on the part of depositors and international markets fading fast, action cannot be delayed, it warns.

According to IMF projections cited in the report, Afghanistan’s economy is set to contract by up to 30 per cent in 2021-2022.  At current rates, about 40 per cent of the country’s deposit base is expected to be lost by the end of the year.

Meanwhile, non-performing loans have ballooned from around 30 per cent at the end of 2020 to 57 per cent in September of this year.

“Prompt and decisive action is urgently needed, with delays in decision-making expected to increase the cost of a banking system collapse – a grim predicament,” the report says.