Afghanistan: Making money in Kabul markets

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By:
Elliot Wilson
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Afghanistan has a fast, efficient, customer-friendly banking system in its network of money traders. They operate where western-style bankers fear to tread – indeed those bankers rely in part on the traders to complete transactions. But the government would like the banks to supersede this old, established system.

No country for bankers

IT’S 8AM IN northern Kabul and the temperature is 35°C and climbing. Scores of financial traders are already hard at work in Shahzada Market, their stalls crammed with bricks of cash yellowed from the sun and frayed from constant fingering. Bundles of the local currency, the afghani, sit cheek by jowl with folds of Pakistani rupees and the occasional small stack of US dollars, mostly twenties and hundreds.

Traders seated on mud steps, perched on balconies or locked behind their stalls look up constantly from their work, eyes darting as they take in passers-by. They look for regular clients and the occasional wealthy lone wolf.

Shahzada – meaning Prince – Market is the beating heart of Afghanistan’s financial system. Brokers have operated out of here – transferring cash seamlessly from Kabul to a thousand tribal areas and foreign destinations – since 1931 when the market was set up by a cousin of King Mohammad Zahir Shah. It is still owned by his descendants.

The key to the informal banking system is the use of freewheeling money markets, where bundles of afghanis are traded primarily for dollars or Pakistani rupees. Another big exchange is in Peshawar, Pakistan, the origin of much of Afghanistan’s foreign trade.

Brokers can transfer cash to accounts in minutes. Give them a $100 bill and it will be in your HSBC or Citi account in the US or Europe – minus a 1% commission at both ends – the same day. Customers still come here in droves – forsaking Afghanistan’s fast-growing banking system – because they trust the traders implicitly, having worked with many of them for generations.

Entering the market, the first impression is of a genteel, businesslike hum. Money is being made here but there is none of the chaos and cursing of the old trading pits of New York and Hong Kong. Like the 18th-century coffee houses that proliferated in the City of London, there is a steady ebb and flow of customers. Most of the traders, called sarraf, are doing business: haggling with customers, exchanging notes and thinking on their feet, working out basis points in their heads as they go.

A giant turbaned dealer half-blocks the entrance to Shahzada – a blue-eyed Pashtun from the northern province of Balkh. Hawking his wares to newcomers – it later turns out that he pays a higher tariff in order to be the first trader operating every morning – his stall is jammed with blocks of Pakistani rupees in denominations of PRe500 and PRe1,000 ($12.05). He can talk, but quickly, as he has business to do. The trader, who will give neither his name nor the tiniest of smiles, says he cuts about 50 separate foreign exchange deals a day, mostly with repeat customers. He takes a 1% cut of each transaction but that depends on the size of the deal: it can vary by up to 50 basis points in either direction.

Healthy income

The Pashtun trader expects to turn over about PRe50,000 ($602 or 30,000 afghani) each day, allowing him to clear a profit of about $5 a day after taxes and tariffs, which run to about 30% of revenues. It’s a pittance by western standards but in a poor agrarian country with annual per capita GDP of less than $500, it’s a highly respectable income.

Within minutes, however, word has got out – there is a foreign financial reporter here with a translator, taking notes and pictures. A man ambles over – the temperature is rising fast and the marketplace is getting seriously busy: why don’t we join him for a cup of tea?

The new host, Qazi Imam Jan, is a stallholder but much more than that. As the secretary and president of Shahzada, it is his job to determine who works here and who doesn’t. To operate as a broker at one of the market’s 300 trading houses requires $20,000 in paid-up capital. With an average of 10 traders in each house, making 3,000 in all – Shahzada boasts about $60 million in paid-up capital – quite a tidy sum for an economy measured in total at $12.85 billion in 2008, according to the CIA World Factbook.

Shahzada’s loose structure operates not unlike the traditional London or New York system of buying a seat on a stock exchange – the seat then being transferable to a third-party broker able to stump up the licence fee. Doesn’t the Shahzada licence cost seem rather steep, particularly for such a poor country? "Maybe it is true," Qazi concedes. "But everyone here can get $20,000 if they try. They can get it from abroad, or by selling their house or land, or borrowing from another merchant."

"Or," he adds, with a lugubrious smile giving him an air of the actor Bill Murray, "they can borrow that money from us. We don’t charge much interest and we always look after our traders." Three traders work for his firm, Qazi Imam Jan Trading Co, and the president extracts a small daily fee from every brokerage house working in Shahzada.

How much money does he make each year – what was his profit last year, or last month, or at the very least his operating margin? Again the smile. "I can’t tell you how much I make," he says. "If I do everyone will know and they will want to come to Kabul to take my business away from me. I know of the problems in London and in New York. If they know how much I make, they will want a piece of it."

The official numbers

Consolidated Afghanistan banking sector data

Source: IMF


Like everything in Afghanistan, Qazi is a bundle of contradictions. He’s had as many careers as hot meals, starting out as an engineer in the 1980s, before studying finance and law at Lomonosov Moscow State University – an after-effect of the Soviet invasion of Afghanistan in 1979. He returned to Kabul, working as a military judge in the early 1990s under president Burhanuddin Rabbani.

When Mullah Omar’s Taliban forces stormed Kabul in 1996, Qazi was tried and sentenced to death because of his foreign connections, surviving only because he was an ethnic Pashtun (most Taliban militants speak Pashto). Had he been Hazara or Uzbek or Tajik he would most likely be dead.

How does he feel about the period between 1996 and late 2001, losing his job as a judge and being forced into a drastic switch of careers at the age of 50? He shrugs. "It makes no difference. I just moved into this market and started making money. In Afghanistan you just get on with things."

Later, as we are leaving, a trader working at a rival firm smiles and nods to Qazi’s teahouse. "He’s the luckiest guy in the market," he says. "He was a communist when the Soviets were here, then a Talib when the Taliban were in charge. Now, he is committed to western-style democracy. Inside he’s a chameleon." Indeed, most Afghans feel this way. They don’t trust democracy, which is yet another foreign system imposed on their millennia-old tribal ways, but they prefer it to civil war.

Yet for all of the success enjoyed by Shahzada Market and such men as Qazi Imam Jan, this generations-old trading system is under threat like never before. Even the Taliban needed these traders, the better to suck in funding from like-minded troublemakers in Riyadh, Peshawar and Karachi. But Afghanistan’s modern rulers – from the recently re-elected president Hamid Karzai and his Canada-educated finance minister Omar Zakhilwal to political backers in the US and UK – are strongly promoting the development of a western-style, working banking sector.

Foreign backers worry that traders working out of Shahzada and in sister markets across the country offer a simple way for hot money to enter the country, funding Taliban insurgencies on the eastern border with Pakistan and in southern Helmand province.

In this respect, foreign concerns are half-correct. Around 90% of the daily trades routed through Shahzada are well-intentioned, reckons a banking industry insider. Migrant workers in Kabul and other key Afghan commercial centres use the traders to wire money back home to family and friends at a marginal cost, a godsend in a cash-driven economy.

Likewise, traders help locals to import foreign goods that cannot otherwise be bought here. Qazi’s own brokers, he says, regularly wire large sums of money – $30,000 and more – to Germany and Canada in order to buy new cars. A Shahzada-linked trader in Frankfurt or Toronto receives a phone call from a local broker informing them that money has been paid to Qazi Imam Jan. They then provide a specific code that could only be known by the traders at both ends – a simple codename or a series of numbers or letters. The trader takes a 1% commission overseas, and the car is paid for out of his pocket once the cash has been transferred. Then the shiny new VW car or GMC truck begins a long, weary journey to the dusty, unyielding streets of Kabul.

Why not rely on banks to do this? Qazi and his traders snort. Most Afghans find it hard, even impossible, to set up accounts at the local banks, he says, since they lack any sort of underlying financial equity or solid asset. This is true: of the country’s 33 million people, just 1.5 million have bank accounts, although this number is rising fast. Most Afghans also still see banks as a foreign invention and therefore not to be trusted.

A trader sits inside Shahzada market, surrounded by bricks of local currency, the afghani

A trader sits inside Shahzada market, surrounded by bricks of local currency, the afghani

By the end of the Taliban occupation in late 2001, Afghanistan’s banking system had virtually ceased to exist. There were still six state-owned banks, all based in Kabul and all, the IMF noted in June, "to a large extent inactive". All lacked connectivity and reliable information on assets and liabilities, and failed to follow any semblance of international accounting standards. Basic regulations were finally imposed in 2003 and 2004, including the Banking Law, passed in September 2003, allowing commercial banks to be formed.

New banks rapidly sprang up. By 2005 there were 11 licensed banks, including three foreign branches, among them emerging market specialist Standard Chartered. By March 2008, the country boasted 16 banks with 183 branches in 20 provinces, 332 foreign exchange dealers and 100 licensed money service providers.

Wealth of options

The nation now boasts a wealth of banking options – yet too many Afghans still distrust them all. At the Shahzada Market, one of Qazi’s colleagues, a mottled-faced man with green eyes and sandy hair who looks and sounds like British actor Pete Postlethwaite, leans in and growls: "Each regime we have to deal with brings different financial systems. This country is just a big financial laboratory. The latest is this westernized banking system, which is just a cut-and-paste version of banks as they exist in London or New York. And it won’t work because it wasn’t our idea and Afghans don’t like things being imposed on them."

Qazi also holds forth on the foreign banking system, noting that the Shahzada traders have been "observing" the global financial crisis. Big foreign banks created these global problems, he states, by dabbling in things they didn’t understand – thus creating doubt in the minds of many Afghans that a western-style banking system can succeed in their country.

"Foreign banks were doing things with sub-prime that they didn’t understand," he adds. "They should have practised first before trying these new schemes out. It’s not hard to get banking right – we manage it and we’re always profitable. I feel great pity for [foreign banks], particularly those that have lost so much money – I feel very deep sadness for their losses."

Shahzada also provides an easy route into and out of Afghanistan for all money, whether hot or not. Does money ever flow through Qazi’s teashop destined for Taliban forces, or for simple out-and-out gangsters – can they ever be absolutely certain who is the recipient in any transaction? Qazi’s teashop goes quiet and the owner’s early exhortation to "ask me whatever you want" is discarded. The Postlethwaite lookalike turns away and takes a while to return to the conversation.

Yet this is clearly a big issue for Shahzada’s traders. Two days later, during a return trip to the market, a conversation is struck up with another trader working on the pavement outside the market entrance. He won’t let himself be named or photographed but says that hot money flows into and out of Kabul all the time. "It comes from everywhere," he says. "A lot from Saudi Arabia but also a lot from Britain, America, Germany, Australia. But not so much from Pakistan.

"We always know if it’s headed for the Taliban as it is always in big sums, often $100,000 or more."

What is the largest amount he has ever transferred in? "$1 million," he says. "At least." Maybe more? "Yes, maybe," he answers. "Maybe much more." But then he smiles, shakes his head and clams up – the conversation is over. It does however prove a claim made by Qazi and other Shahzada brokers: that the government wants the banks to win and the traders to lose. State forces know they can control the flow of money through the banking system better than they can the hot money bouncing back and forth via Shahzada’s brokers.

And it’s clear that, even within Qazi’s teashop, trades are made that might benefit aggressor forces. At one point just after 10am, with the thermometer on the teashop wall showing 39°C, the Shahzada president is describing step by step how he transfers money to the UK.

He outlines the two ways to wire money into the UK. The first is the legal method into London that adheres to UK financial and regulatory laws; the second involves an illegal method that involves a shady-sounding chap in Birmingham. Suddenly the Postlethwaite lookalike gets involved again – there is some earnest banter and a growled word or two. Qazi turns and says grimly: "I made a mistake – the Birmingham office has been closed for years."

Qazi Imam Jan

"It’s not hard to get banking right – we manage it and we’re always profitable"

Qazi Imam Jan

Might this be a route in for Taliban money – or just for gangsters being paid for deliveries of heroin or other illicit activity? Qazi and his colleague look grimmer still and continue the banter back and forth. Qazi turns again and sighs: "I was wrong completely – we have never had a Birmingham office. There is no connection to the city and never has been – I misspoke." Then he adds: "Besides, I have never heard of Birmingham." It’s clear that there will be plenty more discussion on this subject between the two later.

The elephant in the room, however, is the country’s modern banking system. To be sure, the banks need the Shahzada brokers, and vice versa. Traders tread where banks fear to – into the tribal areas and into leading commercial centres under the control of Taliban forces. Banks in turn keep traders’ money safe and secure – most, including Qazi and the Postlethwaite lookalike, have their money tied up at one of the country’s leading banks.

And Afghans do not want for a lack of options when it comes to picking a lender. They can choose from larger, more liquid lenders such as Bank Millie Afghan (BMA), Azizi Bank and Kabul Bank, down to smaller lenders such as the 2008-established Ghazanfar Bank and an older Iranian lender, Arian Bank. As in most countries, large banks dominate here: at end-2006, according to the IMF, five lenders including Azizi and BMA controlled 60% of the country’s banking sector.

Many of the country’s leading bank executives are frustrated at the preponderance of customer choice. A few banks have failed or been sold in recent years, notably Development Bank of Afghanistan, bought in March by Azizi Bank. A few other lenders, notably Afghan United Bank, are rumoured to have suffered heavily during the global financial crisis, mainly because of exposure to real estate investments in Dubai.

Cull on the way

A cull of smaller lenders is expected sooner or later. Speaking at his sweltering, almost deserted offices in Kabul’s central Shash Darak, close to the Nato headquarters and the commerce ministry, the chief executive of BMA, Afghanistan’s second-largest lender, predicts that the number of banks will fall to 12 or 13 within two to three years, and to eight within a decade. Khan Afzal Hadawal criticizes the central bank for having loosened the rules on new bank creation in 2004. "A few lenders had high returns back in 2004 and 2005, and this led to the creation of a bunch of new banks," he says. "They should have set the barrier to entry very high, but they didn’t, and so we have 16 banks, which is way too many."

Yet it isn’t always simple to set up as a new Afghan bank. The Shahzada traders have often considered founding a people’s banking collective, charging lower interest rates than existing Afghan lenders and using their own tried-and-trusted credit system. That involves actually knowing all of their customers and their families for generation upon generation – a system that went out of fashion in the UK some time after the Second World War.

"We would like to set up a bank, but we just don’t have the money," says Qazi. "It takes $10 million to set one up – who has that sort of money? Besides, the government wouldn’t want us to. We would be successful and profitable, and that would make all of the other banks look foolish."

To be sure, the banking sector has grown in leaps and bounds over the past five years. According to a June 2009 IMF report by Jelena Pavlovi and Joshua Charap, Development of the commercial banking system in Afghanistan: Risks and rewards, total domestic banking assets grew from $300 million in 2004 to $1.7 billion by the end of 2008. Fewer than 200,000 customers deposited money in Afghan banks five years ago; the figure is 1.5 million today.

And there are other hopeful signs. Take-up of retail banking is on the rise, as is the spread of the ATM, boosting the adoption of debit cards. With the aid of its banks – but not of its grey-market traders – the country is hoping to launch the Afghanistan Deposit Insurance Corporation (Adic) in early 2010, a national financial protection scheme providing a fiscal buffer for creditors.

In late 2010 or early 2011 the government hopes to roll out a stripped-down national credit rating system within a new state department, the Credit Information Bureau (CIB). These measures are being introduced in alliance with the Afghanistan Institute of Banking and Finance, founded in order to train up-and-coming domestic banking executives and accountants.

To be sure, this being Afghanistan, not all is rosy. Few people are signing up to credit cards, though this is hardly a surprise given the lack of both a banking system and of places to use them.

Until the CIB opens its doors, banks will have to do the legwork themselves. BMA has a five-man credit department that visits neighbourhoods and marketplaces, talking to everyone they can in an attempt to realistically gauge the riskiness of a potential customer: if they are capable of paying back a loan, and if they have multiple accounts at different banks. Azizi Bank typically charges 15% annual interest on commercial or retail loans but raises or lowers the rate by up to 300 basis points based on the creditworthiness or wealth of the customer and the size of the loan.

Security remains a vast and complex issue that will not be solved in one year or in 10. Another big problem is the lack of protection for creditors – an issue being addressed by Adic – or of a system that allows assets owned by bankrupt clients to be tallied and divided out accordingly.

In early August, BMA’s Hadawal completed the first-ever Afghan auction of a client’s assets: $190,000-worth of prime Kabul real estate strewn over three different neighbourhoods. "It took place only after a four-month fight with the local authorities," says Hadawal. "I had a written note from the person himself promising that if he went bankrupt it would be OK to publicly auction his assets, but still the court denied us this right for months. We have a very stupid legal system that doesn’t function properly."

Yet if nothing else, Afghanistan is a den of entrepreneurial activity when it comes to innovative products and ideas. Afghan United Bank offers basic Islamic finance products, while Azizi Bank is turning over an entire subsidiary, Bakhtar Bank, to Islamic banking.

"We are very keen on Islamic finance," says Deepak Shrivastava, president and chief executive of Azizi Bank, the country’s third-largest lender. "Bakhtar is being set up as a specialist Islamic bank covering small and medium enterprises and housing loans, while Azizi focuses on corporate loans and traditional banking. I am positive we can create the country’s leading Islamic finance outfit." These products will include Azizi’s services such as a so-called qismat, or ‘lucky’, account that pays no interest – in accordance with Islamic law – but gives savers the chance to win prizes such as property, cars or jewellery.

Leading firms are also tackling the difficulties of banking in a country riven by decades of war. One way is to offer banking services over mobile phones (cellphone adoption is rising fast across Afghanistan) or, as optical communication networks grow, the internet. Kabul Bank offers the best online and phone banking services, peers say, having started internet services back in 2004. Others are catching up fast.

"Soldiers working in rural areas don’t have access to banks, so it’s important for us to cover these areas," says Shrivastava. "We now have 26 branches based outside Kabul, with plans for six more, but it is vital for us to improve our online and phone banking offerings." Microfinance is beginning to pick up too: the Kabul-based First Microfinance Bank, established in 2006 with capital from Germany’s KfW, the International Finance Corporation and the Aga Khan Fund for Economic Development, offers microloans to farmers and small businesses. It enables them to check their balances and make payments via their mobile phones through a joint venture with Roshan, the country’s leading telecommunications operator.

Back at Shahzada it is past 11am and 43°C, and the traders are moving back into the shade, preparing for the midday siesta. Before Qazi heads off for a nap two curious events occur that highlight the eccentricity of Afghanistan – the strangeness of trying to do business here, particularly in the banking world.

 
Licensed Banks in Afghanistan
October 2007
Bank nameType of ownershipDate of licensing
Afghanistan International BankPrivate Mar ’04
Afghanistan United BankPrivate Oct ’07
Azizi BankPrivate Jun ’06
Arian BankPrivate Dec ’04
Bank AlfalahForeignMay ’05
Bank Millie AfghanState-ownedJun ’04
Brac Afghanistan BankPrivate Sep ’06
Development Bank of AfghanistanPrivate Feb ’07
Export Promotion BankState-ownedSep ’04
Habib Bank of PakistanForeignFeb ’04
Kabul BankPrivate Jun ‘04
National Bank of PakistanForeignOct ’03
Pashtany BankState-ownedJun ’04
Punjab National BankForeignMay ’04
Standard Chartered BankForeignSep ’03
The First Micro Finance BankPrivateMar ’04
Source: IMF
The first is the entrance of a two-man delegation from a leading Afghan Bank. They bow and scrape – clearly they are subservient to the former military judge – and gently place a piece of paper on the table. Hand-written in beautiful Pashto script, it’s an invitation to an evening of local dancing taking place the next day in a hall on the edge of town.

This carefully scripted encounter – the men are in Qazi’s teashop for barely a minute, yet manage to shake hands with everyone there – demonstrates the intertwined, cohabiting relationship that has grown up between the traders and the mainstream banks. It also proves, despite the remonstrations of bank chief executives, that few leading Afghan lenders dare to venture into the more restless tribal regions, forcing many to co-opt grey-market traders into ferrying client money back and forth.

Later on, there’s another, more telling event. Two men, one snappily dressed in a black shirt and yellow tie, step into Qazi’s teahouse. They stand out from the local traders, most of whom wear traditional turbans and gowns. The leader barks out quick sentences, his mannerisms as fussy as his little moustache. After barely two minutes, he departs. The men in the tea shop tut and shake their heads.

Qazi turns to explain. The men were from a state-owned bank. They were sent on the orders of the government to recoup losses made by the state in the mid-1990s when Afghanistan was sliding into chaos. Between 1994 and 1996 all manner of goods entering and leaving the country – from melons and grapes to heroin poppies and munitions – went missing, never to be seen again. The bank officials had been sent to find the traders and businessmen who disappeared too, many of them presumably victims of the civil war. In this case, they want payment on a shipment of fruit that went missing 15 years ago, in 1994.

It seems so incongruous – that the government would hire a bank to scour the markets of Afghanistan seeking settlement on a consignment of pomegranates lost so many years before. It creates a sense of bafflement and anger among the Shahzada traders, as well as a feeling of resignation. The traders have said they shouldn’t have to repay these debts but the government has decided they need to put a tick beside a little box in their accounts, whatever the cost to their reputation or their bottom line.

Why don’t the traders just tell them to get lost? Qazi again does his Bill Murray smile and spreads his hands. "That wouldn’t help," he says. "You have to understand that this is Afghanistan. The bank and the government will come after your children and ask for the debt to be repaid. And if that doesn’t work, they will come after your grandchildren. They will never stop – it’s the government’s money and the government’s attitude is that someone will pay, sooner or later."

Euromoney first wrote about the Afghan central bank in September 2006, Afghanistan gets back to business.