DAIMG’s Critique of Faithful Finance: Unlocking Banking Islamization in Afghanistan

This paper seeks to outline the major challenges faced by the banking sector in the Islamic Emirate and to present some recommendation for its growth and restructuring. Below we present a summary and evaluation of its findings.

Summary: The ideological orientation of the study is evident in the introduction. Afghan society is described as tribal with Islamic values being subordinated to local customs and traditions. Denial of “women’s rights” is lamented. The operation of the local foreign exchange market, the Sarai Shezaad is commended. World Bank projections of Afghanistan’s future macroeconomic performance are relied upon. The Islamic government is criticized for exerting “undue pressure on the banking sector and the presumed “non-resolution” of payments.

The literature survey is dated relying essentially on studies undertaking during the rule of the ghaddar governments (2002-2021). The subsequent analysis is contextualized by this literature survey and fails to realize its irrelevance as the Islamic government is committed to the abolition of the dual banking system which studies in the literature survey presume. The upshot of the literature review is that the transition process to an Islamic financial system should be gradual, stretched out over a long time period and incremental changes should be introduced to existing procedures and practices.

The methodology consists of unstructured interviews with 123 individuals from DAB, Islamic banks, experts, Sharia scholars and opinion makers. The findings of the survey cannot be generalized as the population from which the selected sample has been drawn is not specified and the sample is thus not representative of any population. Moreover, an analysis of the survey data is often mixed with the personal opinion of the authors and no justification is provided for this. The survey design reflects the “insights” of the outdated literature review.

The findings lament the absence of a constitution as a hurdle to the formation of banking sector legislation without any response to survey data. Similarly no data is cited to substantiate the claim that DAB is marginally modifying the new regulatory regime and that banking operations are subject to only minor modifications. The claim that “legal and regulatory system will largely remain the same as under the (ghaddar) Republic” is also not verified with reference to the survey data.

The issue of sukuk products is recommended without refrence to survey findings. The statement that banks in Afghanista do not engage in financing/investment services is also apparently the personal opinion of the authors not a survey finding as the claim that “the banking network itself has discouraged the use of banking services”.

No proof is provided for the personal judgement that “a long lasting blame game between regulators and banks has persisted and that DAB interferes in banks day to day operations” or that “DAB is accused of implementing complex, subjective and vague regulations”. Accused by what proportion of the interviewer? Similarly the claim that the “government has an unfriendly attitude towards the private sector and that the public sector regulating bodies view the private sector as a competitor and that the laws and regulation are designed to enhance regulators control rather than being instrumental (i.e. capitalist) best practices” is not referenced by the interview data.

The paper claims that “neither bank nor costumers have access to independent conflict resolution mechanisms and argues for the establishment of specialized banking courts but this is also the personal opinion of the authors as is the claim of the “system fails to support the private and independent nature of banking”. The study claims that “there is significant risk to convert all banks to Islamic bank but these risks are not identified by the survey data.

The paper identifies the adherence to the Hanafi madhab as a major impediment to the growth of the banking sector and recommends the adoption of a universal Sharia code. But the survey data provides no evidence for this conclusion.

We conclude this that the policy recommendations are not based on the survey findings and should therefore be regarded as the personal opinion of the authors. The main recommendation is to “transform the banking practices to international Islamic standards”. The other recommendation are of a generalized nature including the need for establishing “a clear and comprehensive legal regulatory system, fostering a business friendly environment, promoting investment through public private partnerships and ensuring existing “efficient and effective operation of the banking sector”. Eliminating “discrepancies in product approved by different Sharia boards is also recommended as is “effective and impartial supervision by DAB and avoidance of interference by government’’.

Evaluation: This paper proposes the development of capitalist regulatory framework for the Afghan banking sector.

This study is based on a flawed methodology. Its unstructured survey is based on perspectives derived from an outdated literature review which reflects a different policy environment from that currently prevailing in the Islamic Emirate. Moreover its sample is not representative of a specified population so that its findings lack general validity. Furthermore the reported findings are not exclusively derived from the sample survey – they are often mixed with the personal opinion of the authors and justifications for these personal views are not provided. This paper should not serve as a policy guidelines benchmark.

The paper implicitly advocates a marginal, incremental transition of the existing banking system. The transition process should conform to international ‘best’ practices and should aspire to replicate conventional international Islamic banking practices. The transition process should be market friendly in the sense that the Islamic government should not be an active player but merely a facilitating regulator within the financial system. The decomodification of money and the abolition of money and capital markets are no part of this proposed neocapitalist policy regime.

DAIMG has consistently recommended the transition from a financial to a tamveeli system in the Islamic Emirate. This requires the decomodification of money and the complete supervision of money market transactions. The transition to a tamveeli system should not be a gradual, incremental process. It should not conform to international best capitalist practices or conventional international Islamic banking standards – Islamic banks have all been subsumed by gharar and riba based global money and capital markets. It should be a revolutionary act implemented by state decree. Its explicit purpose must be comprehensive elimination of riba and gharar based transaction forms nationally and delinking with global riba and gharar based markets.

DAIMG has proposed two schemes for transition from the existing financial to a tamveeli system in the Islamic Emirate.

One: we have proposed the nationalization of all financial institutions. Exclusive control over the creation and distribution of money supply (both currency and capital) by the Central Banks through the implementation of 100 percent deposit reserve requirement should be introduced and the initiation of currency and credit planning subordination to a national production policy.

Two: Complete control over currency issue by DAB, implementation of 100 reserve ratio requirement and conversion of all existing financial institutions into mosque based tamveeli institutes for credit allocation at the community level. Mudarba and musharka based tamveeli scheme attracting investment from the public will be launched under both schemes but there will be no continuous trading of shares and no issue of discounted bonds for sale and purchase in the market.