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 monopoly 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 post–World War II (1939–1945) 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 Afghanistan’s 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 Afghanistan’s 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 community’s 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.

2. 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, let’s move forward, let’s change the era of economic development
in Afghanistan, let‘s move Afghanistan ahead and bring it to international 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 aren’t 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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 3. 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.

4. 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.

5. 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. Let’s 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.

6. 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.

7. 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.

8. 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.

9. 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 shouldn’t 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 can’t 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. Can’t we manage at least a website! The information communication technologies are vital to
modern world so let’s 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 Karzai’s 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. M.H De Cock, (1974)., Central Banking

2. Dr. Beverley Mill(1982), Revolutionary Afghanistan’
3. N.T.Somashekar(2009), Introduction to banking,
4. A.K. Basu,(1957), Fundamentals of Banking Theory and Practice.
5. Laws and Regulations of Da Afghanistan Bank accessed from www.centalbank.gov.af
6. Fraderick A. Bradford (1936), Money and Banking.
7. www.centralbank.gov.af
8. www.cso.gov.af
9. www.investopedia.com

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