Afghanistan's financial system is undergoing a slow process of modernization although the traditional financial markets and bazaars still dominate the way individuals, firms and government handle their financial matters. Much like any other sector in today's Afghanistan, slowly, foundations are being laid and modern ideas and expertise are imported from outside by more enterprising Afghan businessmen. It doesn't pay to be so pessimistic with the state of affairs although war and lots of it remains a stark reality in today's Afghanistan. There can be no denying the fact that life for an overwhelming majority of Afghans has improved a lot since the rag tag days of late 1990s and early 2000s. You can clearly see each major city and town bustling with life and activity. Levels of consumption and economic activity have soared to heights unimaginable only a decade ago and a new middle class has risen in the midst of widespread poverty and destitution.
A nouveau riche class of Afghans now flies around in colors buying mega-dollar mansions and apartments, sipping cappuccino in gleaming cafes and sending their families for holidays to Dubai and beyond. Although these are, decidedly, encouraging signs of a better Afghanistan, millions continue to languish in poverty and hunger while the foundations of the current economic expansion are shaky and prone to a sudden collapse. The rise of Afghanistan's new middle class can be largely attributed to the humanitarian dollars being poured into Afghanistan.
Afghanistan's fledgling financial system is a matter of interest these days. It is so not only because of the controversies surrounding Kabul Bank, but also because the need for a modern financial system is being increasingly felt as Afghanistan's economy slowly grows. The country's financial system, much like any other sector, has seen improvements in recent years. The face of the emerging financial system is an army of more than 16 private banks that have so far been granted charter by Da Afghanistan Bank, the Central Bank, to commence commercial operations.
The Kabul bank debacle and the near collapse of Afghanistan's largest private bank have rightly raised widespread apprehensions regarding the state of internal management and corporate governance in Afghanistan's private banks and the capability of the government to effectively regulate them. Although the Kabul Bank tragedy lays bare the ugly face of rampant corruption in Afghanistan in both public and private institutions, the progress made in modernizing Afghanistan's financial system should go ahead at all costs. Hiccups and gaffes on the way are bound to happen and they should not stop the process of emergence and consolidation of a modern financial system in Afghanistan.
Growth of the private sector investment in Afghanistan's economy is unanimously upheld as the ultimate driving force of Afghanistan's economy in the medium to long term. This is so since Afghanistan, unfortunately, no longer has the luxury of traditional government's participation in the economy. The Constitution, by designating a free market economy for the country, prevents the government from playing its traditional roles in organizing the economic affairs of the country.
In the confusion and hubbub of late 2001 and early 2002, the "economic hit men" of the International Monetary Fund and the U.S. Treasury Department were quick to impose a system of free market that is ill-suited to the requirements of today's Afghanistan. Beyond dwindling foreign aid and for long-term development, Afghanistan is left with no option but to rely on a reluctant private sector to invest in the face of widespread insecurity, a corrupt bureaucracy, cumbersome regime of rules and regulations, lack of critical infrastructure and no secure and easy access to free water transport ports in neighboring countries.
However, the magnitude of the problems and challenges should not discourage efforts on the part of the government and its international partners to gradually build infrastructure, clean up the government and the bureaucracy and develop a modern financial system that will suit the modern requirements of a private-sector led economic growth.
Building a modern financial system for Afghanistan would encourage greater private sector investment, foster foreign investment in Afghanistan in the form of Foreign Direct Investment (FDI) or institutional portfolio investments. Likewise, lack of a modern financial system would impede foreign investment and discourage greater integration of Afghanistan's economy with the outside world. A modern stock exchange for Afghanistan
Afghanistan's financial system would be incomplete without a modern financial market that can direct the flow of capital in the country, transform idle cash to capital and then facilitate the investment of this capital in the country's economy. Afghanistan's middle class is slowly expanding. In the years ahead, numbers of Afghans who will earn more than what they consume will increase. All this makes a strong case for establishing a stock exchange in the country that can act as a suitable conduit for directing the country's wealth towards productive purposes.
A stock exchange on the other hand would facilitate the process of capital creation in the country. Creating capital out of all the small, idle cash that lies around, obviously, is an important prerequisite for giving a greater impetus to the process of economic development in the country. A modern stock exchange would also encourage and facilitate the growth of the private sector in Afghanistan by making access to capital easier for them.
Right now, there are hundreds of large-scale Afghan companies with expertise and skills needed to expand their businesses but who lack access to affordable capital. Access to capital for business expansion and investment remains to be extremely difficult inside Afghanistan while foreign investors are discouraged partly due to the absence of proper institutional frameworks for investment in Afghanistan. Establishing a stock exchange would fill the gap in this regard to a large extent while paving the way for the long-term growth of private sector in Afghanistan.
Da Afghanistan Bank, Afghanistan's Central Bank, has floated plans for setting up Kabul's International Stock Exchange. For the time being, the plan is stuck in its tracks and delayed as a result of bureaucratic read tape. This delay, unfortunately, squanders a wealth of economic opportunities that fly by Afghanistan. The establishment of Afghanistan's stock exchange is, however, only one part of a larger plan for the modernization of Afghanistan's financial system.