Only 10 percent of Afghans have a bank account, but Islamic finance may be changing that in Afghanistan and beyond.

The World Bank estimates that only 10 percent of Afghans hold an account with a financial institution, far below the average of 22 percent for low-income nations. The reasons for this are numerous: many Afghans report mistrust of banks, some lack the proper documentation to access financial services, and those living outside major population centers find great difficulty in even traveling to a bank. Of particular note from the World Bank’s Global Findex is that nearly one-quarter of those surveyed in Afghanistan responded that religious reasons play a role in their choice not to have a bank account. Similarly, a majority of business owners responded in a separate survey that they prefer non-interest-based financial products that are sharia-compliant. These findings suggest that a critical barrier to expanding Afghans’ access to finance is the availability of services and products that they feel comfortable using — that is to say, Islamic banking.

What is Islamic finance?

Despite being rooted in principles found in the Quran and hadith (the sayings of the Prophet Mohammad), Islamic banking has expanded largely in response to modern financial needs. The sector has grown rapidly throughout Muslim-majority countries since the 1970s, and estimates predict that Islamic banking assets will continue to grow by nearly 20 percent annually through 2018. This trend is especially relevant to small businesses and entrepreneurs: approximately two-thirds of the microfinance market in Muslim-majority countries is conducted through Islamic banking. For nearly every conventional financial service, there exists an equivalent that meets Islamic standards. The most commonly cited feature of Islamic finance — that charging interest (ribaa) is illegal (haraam) — has resulted in innovative methods to provide access to finance. For example, instead of providing conventional loans, Islamic financial institutions will often engage in musharaka or mudaraba. In these services, a financial institution can provide financing to a client’s endeavor and, in return, will share in its profits. Through this process, the financial institution has an incentive to provide financing to successful entrepreneurs and businesses without having to charge interest.

Islamic banking in Afghanistan

Afghanistan is certainly part of the rising trend of Islamic finance. Like those found in many other Muslim-majority countries, Afghanistan’s banking system represents a dual-track approach, with both conventional and Islamic banking options available to clients. And, as is the case in many other systems, these two tracks are not always entirely separate. While providing conventional banking services, financial institutions in Afghanistan are beginning to open Islamic windows, which offer Islamic financial services and products to those customers who request them. The country’s legal framework is now adjusting to the reality of this system. Promulgated in 2015, Afghanistan’s new banking law formalizes Islamic banking’s status in the country and, for the first time in Afghanistan, provides basic regulations that govern banks’ ability to offer sharia-compliant services. While Da Afghanistan Bank, Afghanistan’s central bank, has the authority to provide regulations on specific services and products, as well as to issue licenses to commercial banks in order to perform Islamic banking services, commercial banks must establish a council of religious scholars to ensure their compliance with Islamic principles.

Financial institutions face a significant burden in meeting this growing demand while also complying with new regulations. Through the USAID-funded Financial Access for Investing in the Development of Afghanistan (FAIDA) project, Chemonics has worked with financial institutions since 2011 to increase the variety of banking services and products — both conventional and Islamic — available to Afghan individuals, families, and businesses. In collaboration with six financial institutions in Afghanistan, FAIDA has developed and implemented over 30 services structured around the most common needs of Afghan clients. Chief among these has been an operational guide to Islamic banking windows, which has facilitated conventional financial institutions’ initial ability to provide Islamic finance options. In addition to offering musharaka– and mudaraba-based financing options, these FAIDA-implemented products also offer leasing options (ijara), cost-plus-profit contracts of sale (murabaha), and insurance (takaful). These new services have been well-received, evidenced by the nearly $13 million of loans to micro-, small-, and medium-sized businesses that have been facilitated through the implementation of these new sharia-compliant products.

There still remain many barriers to creating a financially inclusive environment in Afghanistan, yet there are reasons for optimism. While demand for credit and financial services continues to be high, Afghanistan’s financial sector is beginning to take concrete steps to providing services that meet the specific needs of all Afghans.