Islamic finance in Afghanistan growing, but investment options are limited: report

Sydney

ISLAMIC banking in Afghanistan has nearly tripled its holdings since 2014, but is constrained by uneven profitability, limited investment options and few financing tools, the Islamic Financial Services Board (IFSB) said.

Afghanistan's banking sector is small, but Islamic finance is regarded as a feature that could help attract more people to the formal economy in a country where only 15 per cent of adults have a bank account.

The country is now home to a full-fledged Islamic bank and six Islamic windows in conventional banks.

They held a combined 27.8 billion afghani (S$500 million) at the end of the second quarter of this year, versus 9.7 billion afghani at the end of 2014, data compiled by the IFSB showed.

The country's central bank granted its first Islamic banking licence in April to the Islamic Bank of Afghanistan, after it converted its operations from a conventional banking licence.

Islamic windows grew their assets by 8.95 per cent year-on-year as of the end of the second quarter, but profitability has remained uneven and most have large amounts of idle cash because there are few compliant investments available, the report noted.

The bulk of Islamic financing in the country is offered via only two types of syariah-compliant structures, a cost-plus-profit arrangement known as murabaha and a leasing-based contract known as ijara.

The Malaysia-based IFSB, one of the main standard-setting bodies in Islamic finance, published the data on Afghanistan as part of its quarterly reporting on the industry.

Afghanistan's central bank introduced Islamic banking regulations in 2015 and is working on additional rules covering accounting and pro-duct development. REUTERS