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Afghan central bank’s ‘fragile state’ increases risk of new banking crisis, audit finds

Pedestrian walks by the front of the headquarters of the Da Afghanistan Bank in Kabul. But the bank’s blast wall won’t stop a possible banking crisis in Afghanistan. Photo by Victor J. Blue/Bloomberg via Getty Images

A new report released Wednesday by the Special Inspector General for Afghanistan Reconstruction, SIGAR, says that the Afghan central bank is severely limited in its ability to regulate commercial banks, which could possibly lead to a new banking crisis. The audit was conducted by SIGAR after the near collapse of Kabul Bank in September 2010 when international donor agencies, including those in the U.S., “raised major concerns” about the regulatory capacity of Afghanistan’s central bank, Da Afghanistan Bank. Through its Financial Supervision Department, DAB is responsible for controlling license issuance and oversight of banks activities to maintain compliance laws and regulation of Afghanistan. With lacking oversight, commercial banks can go “unchecked.”

SIGAR suggests that DAB requires outside technical assistance to meet international standards — something that hasn’t been a reality since 2011 when Afghan President Hamid Karzai banned U.S. advisors from working with the bank. Help will not resume, the audit says, until the Afghan government meets conditions provided by the U.S.

We found that U.S. government agencies terminated all of their programs providing assistance to DAB after the Kabul Bank crisis, and have not reengaged due, in part, to the Afghan government’s reluctance to meet conditions stipulated by the U.S. government that must be fulfilled before assistance to DAB is resumed.

The report didn’t make any recommendations for next steps due to the “given impasse” between the U.S. and Afghan governments, though it says SIGAR will continue to closely monitor the situation due to the banking sector’s “fragile state.”

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