Afghanistan Adopts American Banking Practices

September 3, 2010 Topic: Banking Region: Afghanistan Blog Brand: Paul Pillar Tags: Kabul

Afghanistan Adopts American Banking Practices

Kabul Bank's problems sound awfully familiar. Welcome to the world of high finance, Afghanistan.

The ongoing story of problems at Kabul Bank should not seem foreign to Americans still trying to recover from a deep recession triggered by excesses in the financial sector.  The bank's chairman and chief executive, both since resigned, are reported to have "presided over the bank in a reckless and free-wheeling manner" while they were "pouring money into risky investments that crashed."  Sound familiar?

There are some differences, of course.  Most of the risky investments were not mortgages held by under-water American homeowners but instead villas in Dubai (but note how real estate is involved in both).  And the financial ties to political power were not the campaign contributions and lobbying that Wall Street has used (spending $5 billion over the past decade) to buy influence and deregulation in Washington; the Afghan version consists of more direct provision of funds to allies of the Afghan president, in transactions that we in the West might be more inclined to call corruption.  But although the details may differ, the overall political and economic patterns are remarkably similar.

There are good reasons to hope that Afghanistan can develop, with U.S. help, a financial system that resembles the U.S. banking system in some major respects.  It certainly would be better than relying on hawala and similar informal and unregulated financial mechanisms, which among other things are a more convenient conduit for terrorist-related and other illicit transactions.  But the troubles at Kabul Bank suggest that you tend to get the bad along with the good.  Not only that, but what is bad in the United States may be even worse in a country such as Afghanistan.  Right now Kabul Bank is experiencing a Depression-style run on the bank, with many depositors having lost confidence in the safety of their money.  That didn't happen in the United States in the recent recession because of a well-established system of deposit insurance--which Afghanistan does not have.

It doesn't have to be that way.  There is no intrinsic reason the good can't be separated out from the bad, especially in assisting a country such as Afghanistan, where establishment of an institutionalized financial system is to a large degree writing on a blank slate.  We should hope that Afghanistan's economy develops in a way that does not resemble the United States in having a financial sector that is to a large degree parasitic and way out of proportion to the positive contribution it makes in allocating capital.  Let us hope that the greatest rewards in Afghanistan will go to those who build a better mousetrap--or grow a better pomegranate tree--rather than, as in the United States, to the best-positioned, most clever people in the financial  sector.

Welcome to the world of high finance, Afghanistan.  Try to avoid some of the mistakes we Americans have made in that world.