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THE BIG BANG THEORY: CENTRAL BANK OF AFGHANISTAN HAS TO IMPROVE OR DIE!

By M. Zarif Aminyar

Objectives of a Central Bank The objectives of a central firstly depends economics system and may differs in a developed economy depends as compared to those in a developing economy, however in general a central bank in a capitalistic economy will have the following objectives:

Functions of the Central Bank The functions of the central bank differ from country to country in accordance with the prevailing economic situation. But there are certain functions which are commonly performed by the central bank in all countries. According to De Kock, there are six functions which are performed by the central bank in almost all countries.

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What is a Central Bank? Central bank is an organization which supervises, controls and regulates the activities of commercial banks and acts as a banker to them. It also acts as a banker, agent and adviser to the government in all financial and monetary matters. A central bank is also the custodian of the foreign balances of the country and is responsible to maintain the rate of exchange fixed by the government and manages exchange control. The most important function of a central bank is to regulate the volume of currency and credit in a country. A banking institution can more easily be identified by the functions that it performs. According to Vera Smith, the primary definition of central banking is a banking system in which a single bank has either a complete or residuary mono poly in the note issue. Kisch and Elkin believe that the essential function of a central bank is the maintenance of the stability of the monetary standard. In the statutes of the Bank for International Settlements a central bank is defined as the bank of the country to which has been entrusted the duty of regulating the volume of currency and credit in that country. De Kock gives a very comprehensive definition of central bank. According to De Kock, a central bank is a bank which constitutes the apex of the monetary and banking structure of its country and which performs, best it can in the national economic interest. Central banks are government or quasi-governmental agencies with a long history. For example, the Bank of England was chartered in the seventeenth century. But the prevalence and extensive policy-making authority of modern central banks is a postWorld War II (19391945) phenomenon. While modern central banks vary in their institutional relationships with elected officials, their policy responsibilities typically include the development and implementation of monetary policy and regulation of the banking and, sometimes, the broader financial industry. Central Bank in Afghanistan In Afghanistan until 1930 the money bazaars of Kabul and Kandahar (and, to a much lesser extent Herat) represented the only banking system in existence in the country. Not only was Afghanistans trade financed through the money

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bazaars, but they were used to satisfy government banking requirements as well. In that year there were some thirty to forty private exchange dealers in Kabul and ten to fifteen in Kandahar. As a consequence of the revolt against King Amanullah and the brief rule of Bacha-e-Saqao trade had been severely disrupted. King Nadir Shah called on a wealthy Afghan merchant, Abdul Majid Zabuli for advice on the means of economic recovery. Zabuli, the founder of Afghanistans first joint stock company, recommended the establishment of a bank. Such a proposal, put forward earlier by Amanullah, had already been rejected by the religious establishment, who objected to the institutionalization of usury. As an alternative Nadir Shah authorized the establishment by Zabuli of a joint stock company to regulate foreign trade and with a monopoly over sugar, petroleum and motor vehicle imports and cotton, karakul and wool exports. This proved ineffective, and in 1933 the company was reorganized as the Bank Milli and given a monopoly over all foreign exchange dealings. Two years later free market dealings were prohibited, and Bank Milli opened offices in Kabul and Kandahar to take over the functions of the money bazaars. This was the first sign of a government challenge to the private foreign exchange dealers. It resulted in a drop in their numbers, but in 1938 Bank Milli acknowledged defeat and placed its own dealers in the money bazaars. In 1939, a central bank i.e. Da Afghanistan Bank(DAB) , was set up, and in 1943 took over from Bank Milli responsibility for foreign exchange. Immediately after World War two its ineffectiveness in this regard was demonstrated when a depreciation in free market exchange rates occurred causes apparently by sudden and substantial increase in imports. to meet unsatisfied demand during the year. To be epigrammatic , looking at the history of Central bank of Afghanistan one can easily derive that the central bank of Afghanistan has been very ineffective in its measure to control and stabilize the economy. In the past at least the central bank was using some of its measures to stabilize the economy but after Dr. Najibullah regime till now the central bank of Afghanistan has been neutral or doing very little as in the case of today. The current central bank of Afghanistan (Da Afghanistan Bank) today, despite of the huge financial support from the international communitys is not capable even to perform its indispensable duties as a central bank. There are many points that can be given to elaborate how poorly the central bank of Afghanistan is operating; to combat the crisis or adverse economic conditions in recent years. The purpose of this article is not to present the flaws, but to provide some tangible and pragmatic suggestions for quick improvement, which are given as follows: 1. As we know that monetary policy focuses on currency management. Monetary policy instruments available to central banks vary, but they may include authority over reserved requirements for commercial banks; the ability to lend directly to banks and, in some cases, other financial institutions; and the capacity to participate in open market operations (the purchase and sale of government securities). These responsibilities often include serving as a lender of last resort. Each policy tool is designed to influence the extent to which cash is available to commercial markets, hence Da Afghanistan bank can utilize these policies, but for doing this there should be a very strong and able committee/personnel which should have the capacity and real exposure of playing with these policies as these policies are very elastic and might be deceptive in many cases at macro level. Why not establish a stock exchange market? Stock exchange market is indeed indispensable for a country booming its economic condition. I would like to ask the higher authorities till which time Afghanistan would be left in traditional economic system, lets move forward, lets change the era of economic development in Afghanistan, lets move Afghanistan ahead and bring it to internation al standards where we will be able to attract more foreign investments and boost up our international and domestic trade markets. Are we just even backward nation than some African countries where they already have stock exchange markets established? No we arent we have everything, in terms of considering natural resources , geo political factors or human resources we are far better than even UK or Germany but these resources should be utilized in order to bring the country into certain standards which are acceptable to international markets.

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Commodity exchange markets are proved to be very productive in some developing countries; therefore, here I would suggest establishing commodity exchange markets in rural Afghanistan. This can be done by the credit department of Da Afghanistan bank with ministry of economy, finance and commerce and industry. I think this initiative will need more time and capable group of economists and policy makers to work on it, but at the end of the day it is indeed worthy since these markets will facilitate credits to farmers and gradually agricultural sector of Afghanistan where we are always behind will expand. Ultimately this will result in prosperity and self-sufficiency of Afghanistan. Da Afghanistan bank can manage the availability of financial resources in an effort to achieve their statutory policy goals like stable prices, high employment, and economic growth. I would suggest the central bank of the country to seek help of economists in Afghanistan and abroad why not establish a committee of the most prominent economists lives in Afghanistan or even the Afghan living beyond the borders can be associated. This committee should be given full membership where they will share their concerns, interests, researches and recommendations in respect to stability in prices, high employment and economic growth. A committee to be established to revise and develop financial laws for Afghanistan. This committee should be directed by Afghan policy makers and of course international experts should also be given reservation in the committee, but these should not be given the autonomy as the experience shows they will copy and paste their laws without contextualization; which is indeed a perilous affair. Lets be pragmatic while developing laws and regulations since building castle in the air may not be applicable while dealing with real life economic problems. A committee or Shariah board should be established to look after the Islamic banking laws, possibilities and supervision. This committee should not be chaired by Mullahs, but by Economists with shariah knowledge and Islamic banking qualification and exposure. First of all, the central banks should remove the interest element only if it is possible to capture the market by Islamic banking. Islamic banking should not be dealt like a marketing technique since it will be short run business instead it should be implemented in reality. I would say no need to hurry for a possible transition to Islamic banking. It is productive if a gradual and steady transition is performed. Since pathetic conversion from conventional banking to Islamic banking in Iran has resulted in a huge crisis in recent years. Islamic window should be opened by banks only after the development of Islamic banking laws in Afghanistan and strict supervision is a key to long term success of the phenomenon.

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Governors of the Da Afghanistan bank should be elected for five years at least and no rights shall be given to the president or congress of the country to dismiss or fire the governor. This selection should be approved by the parliament of the country and the figure should be independent not affiliated to any party whatsoever. Human resource department of Da Afghanistan bank should recruit only suitable and eligible candidate for the various capacities, based on meritocratic system and unnecessary job rotations should be alleviated to improve consistency, integrity and specialization. The Afghanistan institute of chartered accountant should be established. This can be again done if a committee is established consist of all the ACCA graduates, economists, bankers and policy makers. This institute will generate the future auditors for Afghanistan and we will no longer need auditing our banks or companies by employing foreign auditing companies. No matter whatever structure is Da Afghanistan bank, it should be given formal and actual authority and independence in its all affairs and not intervention should be entertained and allowed from whatever source. Even though, central bank independence from the influence of elected officials is not trivial, nor is it an easy concept to measure. Political economists have long argued that politicians have strong electoral incentives to manipulate monetary policy. Some argue that politicians use monetary policy to boost economic growth near elections; others contend that politicians manipulate monetary policy to achieve

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partisan goals. Political economists also argue that the political manipulation of monetary policy tends to induce inflation without producing significant long-term increases in income or employment. Substantial empirical evidence supports the presence of an inverse relationship between central bank independence and inflation, the variability of inflation, and the variability of interest rates; hence I would suggest its independence since it will be more productive and fertile for Afghanistan. 10. Also, Da Afghanistan bank should not depend upon an annual budgetary allocation from parliament or ministry of finance to cover its operating expenses. This will result in institutional protections against the encroachment of elected officials. 11. The supervision and policy making department of Da Afghanistan bank should be given immense importance in order to strengthen the financial markets of Afghanistan and the economy at all. 12. The issue of money laundering and terrorist financing should be seriously controlled as these areas have got very severe consequences for the country at long run. Especially money laundering will leak the entire economy if it is left unattended. 13. Discounting credit facilities should be agreed immense attention as in reality banks are banks if they lend credits; if not they cease to be banks. On the other hand, country needs to accelerate the circulation of money and one of the ways to do so is, to discount credit facilities easily and safely to people. 14. The Afghanistan institute of banking and finance is really into strengthening the financial sector of the country so shouldnt be terminated as most of the projects are faced to, but should be given further attention and motivation. This can be one of the centers for excellence in Afghanistan training the future workforce for not only financial industry of Afghanistan but of the region.

15. The associations such as Afghanistan Bank Association (ABA) and Afghanistan Microfinance Association (AMA) should also be given immense attention and should be really turn to doing what they are established for. These types of associations are key toward brining integrity, coordination among banks and MFIs and supporting the financial institutions. 16. The media and publication section of the Da Afghanistan bank should also be brought into category of importance to update the press, issue magazines, periodicals and statistics regarding economic conditions in Afghanistan. Nation needs to know about what is being done for them or what is the current state of affairs; so why not let the people also know how are the things going on as most of the countries are doing so. 17. One of the reasons behind devaluation of Afghanis is the usage of other currency in the country. Strict measures should be taken not only by words but should be implemented in reality whoever is found transacting with foreign currency within Afghanistan should be jailed or fined accordingly and moreover money exchangers should be given license and those who are not having licenses should not be permitted to do the money exchange business. 18. Most of the statistics are really inferior in Afghanistan and cant be relied, therefore it will be productive if Afghanistan central statistic office cooperate with the Da Afghanistan bank while gathering, deriving and issuing these statistical information. 19. I was teaching Afghanistan economy to the undergraduate students in Afghanistan a year back. Weirdly I was unable to find any useful information about central bank of Afghanistan in its website or any other source. Cant we manage at least a website! The information communication technologies are vital to modern world so lets pay them adequate attention and importance.

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20. At last but by no means the least, Da Afghanistan bank should duly use measures to turn the cash economy to credit where most of the transactions are done using bank credit cards and cash usage becomes narrower. At least less than 50 %. I potently believe if urgent and immense attention is not given to the above critical areas, the central bank of Afghanistan will further lose its importance as an apex institution in the banking and economic structure of Afghanistan. Very feeble and pathetic supervision of commercial banks in recent years shows that central bank of Afghanistan has to urgently improve or die. The Pashtany Bank issues in the past and the Kabul bank issue recently has actually got extremely diverse affects and influences on the entire banking industry of Afghanistan. The problem of omitting three zeros in past is still creating doubts and reservations in the minds of customers and the collapse of Kabul Bank due to regulatory feeble management has brought the infant industry to face with a huge challenge of credibility and reliability which is the most important element of banking in a country. If the central bank of Afghanistan will not pay urgent attention on supervision we will still face similar crisis in the future. I would say that banking industry in Afghanistan is just miserable at the moment and I afraid the central bank of Afghanistan will cease to be a central bank.
Conclusion

The central bank of a country acts as the leader of the money market, supervising, controlling and regulating the activities of commercial banks and other financial institutions. It acts as a bank of issue and is in close touch with the government, as banker, agent and adviser to the latter. In 1939, a central bank (Da Afghanistan Bank), was set up, and in 1943 took over from Bank Milli responsibility for foreign exchange. After Dr. Najibullah Ahmadzai regime till now the central bank of Afghanistan has been neutral or doing very little functions as in the case of today. The main factor behind this is decades of internal, external wars and foreign interference in Afghanistan. From the beginning of Karzais regime, the central bank of Afghanistan has been very ineffective in its all objectives, functions and responsibilities toward Afghan nation. The fact of huge international support dependence, the existence of fragile economy, the security issue, the money laundering and existence of mafia economy dominated by warlords and other criminals, the injustice governmental structure, bribery and corruption, bias, nepotism, incapacity of human resources, foreign interventions etc. have brought the central bank of Afghanistan (DAB) to a critical stage where it has to improve or die. Recommendations discussed in this article are indispensable to DAB functioning as a powerful central bank as Afghanistan no more can afford to a have a central bank mere by the name. Bibliography: 1. 2. 3. 4. 5. 6. 7. 8. 9. M.H De Cock, (1974)., Central Banking Dr. Beverley Mill(1982), Revolutionary Afghanistan N.T.Somashekar(2009), Introduction to banking, A.K. Basu,(1957), Fundamentals of Banking Theory and Practice. Laws and Regulations of Da Afghanistan Bank accessed from www.centalbank.gov.af Fraderick A. Bradford (1936), Money and Banking. www.centralbank.gov.af www.cso.gov.af www.investopedia.com

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