VZCZCXRO3670
RR RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #0564/01 0460552
ZNR UUUUU ZZH
R 150552Z FEB 10
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 5596
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 02 KABUL 000564 
 
SENSITIVE 
SIPDIS 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON AF
SUBJECT: Afghan Banking Sector Booms but Concerns Remain about 
Systemic Health 
 
REF: KABUL 551 
 
¶1. (SBU) Summary:  The Treasury Attache Office met with officials 
from six of the seventeen banks operating in Afghanistan in January 
to gather views on the health of the sector.  These meetings were 
held with a broad range of formal financial institutions, including 
large (Kabul Bank, Azizi Bank, and Afghanistan International Bank), 
medium (Afghan United Bank), and small banks 
(Ghazanfar Bank), and one state-owned bank (Bank-e Millie).  At each 
meeting, bank officials and discussed plans for expansion in 2010. 
However, each banker also noted concerns about the sector as a whole, 
including weak bank supervision, lack of a functioning banker's 
association, and ongoing rumors that the largest banks in Kabul are 
heavily exposed to the Dubai property market (NOTE: More detail on 
accusations of Kabul Bank and Azizi Bank's exposure to Dubai are 
reported reftel).  Bankers also uniformly expressed frustration that 
U.S. economic sanctions on Iran have prevented them from financing 
legitimate trade, an issue Treasury is currently looking into.  End 
Summary. 
 
Banks Booming in Afghanistan Amidst Growing Concerns 
--------------------------------------------- -------- 
 
¶2. (SBU) The financial sector is Afghanistan's second largest 
service-based industry (behind only telecommunications) and an 
important driver of private investment and economic growth.  The 
sector has grown rapidly since the end of Taliban rule.  Today, 17 
commercial banks operate in Afghanistan, with total assets of $3.0 
billion (compared to assets of less than $300 million in 2004). The 
sector is a major employer of young people and women. 
 
¶3. (SBU) Despite the financial sectors' rapid expansion, Afghan 
bankers and other observers have concerns about the fragility of 
specific banks and the sector as a whole.  Every bank official spoken 
to cited weak banking supervision as the biggest threat to the 
financial sector, even though the Banking Supervision Department at 
Da Afghanistan Bank (DAB) - which is the Afghan Central Bank - has 
made significant improvements in regulation and supervision in recent 
years. According to bankers, DAB is unable to keep pace with the 
sector's growth because it lacks sufficient knowledge and staffing. 
For example, the Supervision Department has only four people covering 
anti-money laundering/combating of financing of terrorism (AML/CFT) 
issues for the entire Afghan financial sector.  (Comment: USAID 
technical advisors are working with DAB's Banking Supervision 
Department to build capacity and Treasury has assigned an advisor to 
train DAB staff specifically on AML/CFT investigation.) 
 
¶4. (SBU) Bank officials also cited the Afghanistan Banks 
Association's (ABA) ineffectiveness as an impediment to strengthening 
the financial sector. The ABA is intended to foster coordination 
among Afghan banks and present a unified voice in discussions with 
DAB.  However, the ABA has been undermined by poor leadership and 
lack of trust among its members. Currently, Kabul Bank CEO 
Khalilullah Frozi is the Chair of the ABA, but he rarely attends 
board meetings and ABA members question his leadership and financial 
background. Frozi's lack of leadership and the mistrust between ABA 
group members has resulted in a dysfunctional organization that has 
tended to split apart on issues according to political and ethnic 
affiliations. Officials also noted that the ABA is hampered by a weak 
secretariat (a role currently handled by one person) and the absence 
of a legal advisory staff.  (Comment: The Treasury Attache Office is 
working with interagency and international partners to establish a 
Financial Services Advisory Group (FSAG) to fill the coordination and 
information-sharing role needed in the Afghan financial sector.  The 
FSAG will meet quarterly to identify emerging issues, hear from 
industry leaders, and develop strategies and recommendations to 
strengthen the formal financial sector and expand access to credit). 
 
¶5. (SBU) Several bank officials lamented the lack of a private credit 
rating agency to rate borrowers' creditworthiness.  The DAB recently 
launched the Credit Information Bureau (CIB) to help serve this 
function, however bankers noted that the CIB would need several years 
to collect sufficient data to fulfill this role.  Other recent 
initiatives taken by DAB to strengthen the financial sector include 
initiating a Collateral Registry, establishing the Afghanistan 
Institute for Banking and Finance (AIBF) to improve the skills and 
knowledge of workers in the financial sector, and starting the Afghan 
Deposit Insurance Corporation (ADIC), which will cover deposits up to 
$2000. 
 
U.S. Sanctions Against Iran Hurt Afghan Banks 
and Commercial Traders 
--------------------------------------------- 
 
¶6. (SBU) Multiple Afghan bankers complained that U.S. sanctions 
against Iran prevent them from signing Letters of Credit with Afghans 
who trade with Iranian companies or ship/receive goods that transit 
through Iran, thereby undermining legitimate commerce.  (Note: 
Afghanistan imported $200 million of merchandise imports from Iran in 
FY2008/09, representing 6% of Afghanistan's total imports.  In 
addition, goods flowing between Western Afghanistan and the rest of 
 
KABUL 00000564  002 OF 002 
 
 
the world often transit through the Iranian port, Bander Abbas). The 
Treasury Attache noted that U.S. sanctions against Iran, which are 
implemented by the Office of Foreign Asset Control (OFAC), were not 
intended to hurt Afghan commerce.  The Attache Office has put in an 
information request with OFAC to discuss whether these unintended 
consequences can be minimized. 
 
Afghan Institutions Seek Correspondent 
Relationships with U.S. Banks 
-------------------------------------- 
 
¶7. (SBU) Almost all of the officials we spoke to discussed their 
desire to establish a correspondent banking relationship with a major 
U.S. bank. Opening a correspondent account with a U.S. bank allows 
the 'corresponding' foreign bank to receive deposits, make payments 
on behalf of, and handle other financial transactions for that U.S. 
bank. Payments through correspondents are often executed through 
reciprocal accounts. This indirect relationship means that banks need 
to undertake significant due diligence and risk assessment before 
entering into a correspondent relationship due to the risk of money 
laundering and illicit financing. The U.S. government can make these 
assessments more or less arduous for Afghan banks by changing 
regulations - providing a useful carrot/stick to gain bankers' 
cooperation. 
 
EIKENBERRY