Afghanistan’s Banking System Mere Months Away From Collapse

By Todd Crawford | November 22, 2021
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KABUL, AFGHANISTAN - SEPT. 29: People wait to withdraw money outside a bank on September 29, 2021 in Kabul, Afghanistan. It has been a month since the banks started operating in Afghanistan, but despite this period, the activity of these banks has not returned to normal. (Image: Husnul Mahab Azizi ATPImages/Getty Images)

On Monday, Nov. 22 the United Nations (UN) called for urgent action to support Afghanistan’s banks, warning that an increase in people being unable to repay loans, lower deposit amounts and a cash liquidity crunch could cause the Afghan financial system to collapse within mere months. 

In a three-page report obtained by Reuters the U.N. Development Programme (UNDP) said a banking system collapse in Afghanistan and the “consequent negative social impact would be colossal.”

After the chaotic U.S. withdrawal from Afghanistan on Aug. 15 the Afghan economy has been in freefall, placing significant strain on the banking system, which implemented weekly withdrawal limits in an attempt to stop a run on deposits. 

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

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Compounding the issue are sanctions levied against Taliban leaders by international players.

Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters, “We need to find a way to make sure that if we support the banking sector, we are not supporting [the] Taliban,” adding that, “We are in such a dire situation that we need to think of all possible options and we have to think outside the box.”

Afghanistan’s banking system and overall economy was vulnerable prior to Taliban rule, however since the Taliban took over development aid has vanished, billions of dollars worth of Afghan assets have been frozen abroad and the UN has said that aid groups are now struggling to get cash into the country.

UNDP proposal to support Afghanistan

The UNDP has tabled a proposal that it says could potentially save the Afghan banking system. The plan includes “a deposit insurance scheme, measures to ensure adequate liquidity for short- and medium-term needs, as well as credit guarantees and loan repayment delay options.”

The UNDP said, “Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process.”

The UN has, on several occasions, warned that should the Afghan economy collapse it would fuel a refugee crisis and that if the banking system fails it could take decades to rebuild. 

According to the UNDP report, 40 percent of Afghanistan’s deposit base could be lost by the end of 2021. It said that banks have stopped approving new credit and that delinquent loans had almost doubled to 57 percent in September compared to the end of 2020.