Afghanistan eyes Sukuk as Western funds retreat

18/05/2012 21:26 AST

Fearing funds from the west will dwindle after foreign combat troops withdraw at the end of 2014, Sukuk is being considered as an alternative form of financing for the Government.

Khan Afzal Hadawal, first Deputy Governor at the Afghan Central Bank, told Reuters that the sale of short-term Sukuk is still in the planning stage, but could be a new way of raising money for the Government. "The purpose is so that the Ministry of Finance can have tools for their financing to cover their expenses," Reuters quotes Hadawal as saying.

"We have to develop the financial markets of Afghanistan. We have to offer those instruments not only for the banks, (but) so that the government has an alternative to finance their projects and the central bank can control money growth."

According to Hadawal, Sukuk are expected initially to be issued in the Afghani currency and offered to local banks within the next year. They may gradually be expanded to medium- and long-term bonds. A draft law on the bonds must be approved by the justice ministry, and possibly parliament, and should be completed by the end of September, Reuters quotes Hadawal as saying.

Thirty years of war and insurgency has reduced Afghanistan to a strong reliance on foreign aid; the country has received more than $32 billion in international aid since US led forces toppled the Taliban in 2001. The Government wants to expand Islamic finance to draw more assets into the financial system, help reduce the nation’s reliance on overseas aid and rebuild the country’s brittle economy.

Islamic finance has the potential to draw billions in deposits from citizens wary of the country’s conventional banking system. Afghans also often prefer cash transactions to interest-based banking, which has stunted the growth of local businesses. An Islamic banking law could breathe hope into an industry darkened by war and corruption.

Hadawal believes that Islamic finance can coax Afghanistan’s unbanked population into taking their funds from under their mattresses and placing them back into the economy. “The demand for Islamic bank services is very high in banked and unbanked populations of Afghanistan. bankers estimate that there is close to $30 billion in circulation that remains untapped by the banking sector,” he told Islamic Business & Finance.

“The crisis showed Islamic banking provides more transparency. Islamic banking can show people that their money is safe and secure in tangible projects that are being developed.”

CPI Financial