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Taliban want to replace conventional banking system with Islamic banking

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KABUL: The Taliban-led Central Bank of Afghanistan has established a committee to review and amend the Central Bank Law and the Banking Law of Afghanistan, a local news outlet reported.

In Islamic banking, there are no loans and credits in for financing trade, industry and agriculture except Qard Hassana and where profit and loss sharing is not feasible, like interest free loans given by federal government to provincial governments for their developmental needs. 

According to the Central Bank, a seven-member committee is set up to study and propose amendments to the Central Bank Law.

The committee has to adjust the legal framework of the Central Bank with the Islamic banking system and eliminate the conventional banking system.

The Central Bank Law is almost sixty years old and does not provide any grounds for an Islamic banking system. Instead, the Banking Law provides mechanisms through which Islamic and conventional systems can be implemented.

The commercial banks have special windows for Islamic banking which are regulated by the Central Bank-issued regulatory framework.

he banking sector has assisted in economic development of Afghanistan throughout the past two decades and Islamic banking is widely one of the fastest growing sectors not only in Afghanistan but in the Middle East market. 

In 2018 the Central Bank licensed the first Islamic bank: Islamic Bank of Afghanistan, which was previously operated under the conventional banking system. This bank applies interest-free principles of Islamic finance in all its operations. Since then, no other bank has been licensed to operate a full-fledge Islamic banking system in the country.

The committee to amend the Banking Law and the Central Bank Law lacks the necessary expertise to evaluate the current regulatory framework and propose Islamic banking regulations. No one in the committee has expertise in Islamic banking and none have worked in the sector.

In addition to the above challenges, the legislative documents process is unclear so far. Since the Taliban seized power in August last year no law or regulations were processed and published on the official gazette of the country. It is unclear where the committee’s proposal will go in order to be approved.

Additionally, the Central Bank has instructed all commercial banks to convertto the Islamic banking system. The commercial banks are instructed to provide the Central Bank with their plan explaining the timeline and the necessary changes for converting into Islamic banking systems. The First Micro Finance Banking Bank of Afghanistan has already started the conversion and recruited companies to re-structure the bank to become an Islamic banking system.

One of the major challenges that the financial system of the country would face is that the Central Bank as well as the Taliban-led government has to deal with lack of capacity enforcing the Islamic banking system in the country. The Central Bank has always talked about the challenge not only in the Islamic banking area but also in the conventional banking area as well.

The Central Bank now has its special Propagation of Virtue and Prevention of Vice section. According to some people at the Central Bank the officials in this section instruct the central bank employees to keep their beards, pray five times a day, and have even told some that if they do not comply with the above, there will be no salary for them.

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