Rethinking payments in Afghanistan

Afghanistan remains a challenging environment for accessing reliable, transparent, and low-cost financial services. According to 2017 Global Findex, only 15 percent of adults had an account at any financial institution (including mobile money accounts), compared to the average of 70 percent in South Asia. This number has fallen further in most recent 2021 Global Findex, where only 10 percent of adults had an account. Hobbled even before the start of the interim Taliban administration in August 2021, the banking sector now suffers from structural vulnerabilities and very limited international connectivity. De-risking by international banks has meant that international payments through banking channels have become few and far between.

This has resulted in an increasing reliance on physical cash shipments into Afghanistan (over US$2 billion since August 2021). Domestic banking channels are also very strained – liquidity constraints and withdrawal limits continue to erode the public’s confidence in the banking system.

The international community and Afghan stakeholders mobilized to develop pragmatic policy and economic responses to avert an unprecedented humanitarian crisis

Lightly regulated financial services such as money service providers, or hawala, fill the void to provide everyday financial services for many Afghans . A significant brain drain since the events of August 2021 has resulted in a lack of expertise and capacity at the Afghan central bank, Da Afghanistan Bank (DAB). This further complicates financial regulation and supervision in the country. In this context, the perceived anti-money laundering and terrorist financing risks in Afghanistan continue to escalate, resulting in greater isolation of the Afghan financial system from international markets. 

The international community and Afghan stakeholders mobilized to develop pragmatic policy and economic responses to avert an unprecedented humanitarian crisis in 2021-2022. Implementation of humanitarian exceptions to sanctions by the international community removed potential legal impediments for the provision of humanitarian assistance to support basic human needs.   However, even with these measures, Afghanistan continues to be perceived as a high-risk jurisdiction for international banks and is thus all but cut off from formal international payment channels. 

While some partners continue limited technical discussions with DAB, nearly two years later there is still no clear path for unlocking Afghanistan’s isolation from the international payments’ ecosystem. And domestically, increasing reliance on informal service providers has resulted in further marginalization of the formal financial system within Afghanistan. A more sustainable framework is required to facilitate international and domestic transactions for both humanitarian efforts and to support private sector activities. 

Building a Shared Vision for Unlocking Constraints

To build a common understanding of the emerging issues around international and domestic payments in Afghanistan, the World Bank convened an inaugural Afghanistan Payments Conference in Dubai in June 2023.  The event was developed in partnership with the Afghanistan Coordination Group (ACG). The ACG coordinates assistance from international aid partners and provides a platform for strategic dialogue on Afghanistan. The ACG includes representatives from the main donor governments supporting the Afghan people, as well as the United Nations, European Union, Asian Development Bank, Islamic Development Bank, and the World Bank.

An opportunity exists to work more closely with private financial services providers to reassess existing payment modalities and develop safer, sustainable, and lower-cost alternatives.

The payments conference was designed to garner support and foster commitment for collective efforts to help alleviate bottlenecks in the payment’s ecosystem from the more than 100 stakeholders in attendance.  Participants included experts from domestic and international banks, digital service providers, international partners, money service providers (including the traditional hawaladars) and civil society representatives. The consultative, 2-day workshop was designed to map out the modalities, risks and opportunities emerging in the payment’s ecosystem of Afghanistan, particularly in the distribution of aid. The event highlighted issues and risks faced by development partners, and future events will also focus on the issues faced by the private sector as it tries to conduct business with fractured payments channels. 

One thing was clear from the event – despite the deepening crisis, there are opportunities for innovation in financial services.  A new crop of digital financial service providers seeks to leverage mobile phone adoption in a country that remains mostly reliant on physical Afghani and US dollar banknotes.  As such, this unprecedented situation can also serve as an opportunity to spur digital channels for financial inclusion and innovative payment channels.

Now, an opportunity exists to work more closely with private financial services providers to reassess existing payment modalities and develop safer, sustainable, and lower-cost alternatives.  The World Bank facilitated this first conference to map out the current financial services landscape for aid efforts. The next steps will be to pivot towards smaller, technical working groups to solicit innovative solutions and pilots. The World Bank and ACG plan to convene stakeholders as part of a series of technical events to develop alternative modalities, especially for development projects currently in the design phase and under implementation. The goal is to solicit ideas for pilots and innovations in payments that can be replicated and scaled up both for aid efforts and to facilitate the private sector.  Strengthening the payments system and bolstering the private sector are key to reviving the economy and improving the lives of the Afghan people.