Islam, Islamic, Islamic News, Fatwa's and Islamic Business/Finance with Islam Online - The premier and trusted provider of online Islamic content.

Afghanistan Mulls Islamic Finance

Published: 18/05/2012 04:18:24 PM GMT
Related Stories

KABUL - Depending for years on Western dollars paid to support NATO's war on Taliban, Afghanistan intends to sell Islamic bonds to raise money for the government and avoid an expected cash shortage. The purpose is so that (more)

KABUL - Depending for years on Western dollars paid to support NATO's war on Taliban, Afghanistan intends to sell Islamic bonds to raise money for the government and avoid an expected cash shortage.

"The purpose is so that the ministry of finance can have tools for their financing to cover their expenses," Khan Afzal Hadawal, first deputy governor at the Afghan central bank, told Reuters in an interview on Thursday, May 17.

"We have to develop the financial markets of Afghanistan. We have to offer those instruments not only for the banks, (but) so that the government has an alternative to finance their projects and the central bank can control money growth."

Over more than a decade, billions of dollars flooded Afghanistan treasury since the Taliban government was toppled in 2001.

Afghanistan may need around $7.8 billion (4.8 billion pounds) a year in foreign funding to help pay its security and other bills after most U.S.-led NATO combat troops leave, according to the World Bank.

It is likely to receive about $4.1 billion in aid for its security forces per year after 2014, but that number could fall.

The new Islamic bonds (sukuk) are expected initially to be issued in the Afghani currency and offered to local banks within the next year. They may gradually be expanded to medium- and long-term bonds.

A draft law on the bonds must be approved by the justice ministry, and possibly parliament, and should be completed by the end of September, Hadawal said.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Islamic Funding

Along with saving economy, the new shari`ah compliant Islamic bonds are expected to give Afghans a sense of stability."(Sukuk) are something new and people have access to financing, something compliant with sharia ... and the most important thing is, something very secure, guaranteed and people are not worried that they will lose it," Hadawal said.

Islamic bonds will gradually replace capital notes that used to manage liquidity and have weekly auctions of around $40-$80 million depending on market conditions, central bank officials said.

Total investment in capital notes stands at around $714 million with yields of about 2.13 percent for 28-day paper.

Details of the assets, amount, maturities and issuance time-frame would be determined after Afghanistan gets technical assistance from the International Monetary Fund, Hadawal said.

"We do not have the people ... who are familiar with the products, with the terms and then with the maturities," he said.

Afghanistan is one of the poorest countries in the world, with annual per capita income of just $528.

In December 2010, UN Assistant Secretary-General for Humanitarian Affairs Catherine Bragg said some 7.4 million Afghans were living with hunger and fear of starvation.

Afghanistan ranks 155th out of 169 countries on the UN Development Program's Human Development Index, which measures health, knowledge, and income.

The Shari`ah-compliant system is now being practiced in 50 countries worldwide, making it one of the fastest growing sectors in the global financial industry.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets amounting to $1.6 trillion (1.2 trillion euros).

Reproduced with permission from