Banking On Afghanistan

April 18, 2009 (Forbes, Madalina Iacob): Sitting in a half-empty Airbus 32S heading to Kabul in February, Ravinder Yadav and his wife Anita had just packed up their house in Delhi for a new life in Afghanistan, where Yadav was about to become chief operating officer at Ghazanfar Bank, which opened its doors on March 1.

With brand new offices, lacquered wooden doors and red carpets in front of glass-covered teller stations, the bank has attracted more than 1,000 customers so far.

"There is a lot of money in Afghanistan," says Yadav, a tall, rugged man in his 50s with a brush-like mustache. "While banks are closing around the world we are opening them here."

Seventeen banks with branches around the country are now operating in nationally, generating 5,000 jobs since 2003, when the Afghan Central Bank resumed licensing. Fueled by an infusion of international aid, the economy has been growing steadily in the past five years. The U.S. alone spent $31 billion on military and civilian aid since 2002. Real gross domestic product growth exceeded 7% in 2008, according to CIA data.

"Since 2002 we had double-digit economic growth rates until this year, when agriculture production declined because of the drought," says Tom Engle, economic counselor at the U.S. Embassy in Kabul.

According to the Central Bank, the 17 banks had deposits of $2 billion in January 2009, up 69% from the previous year, and total outstanding loans of $1 billion, up 37% year to year. The total assets of the banking system were $2.4 billion this year, up 66% from 2008. "In Afghanistan there is a great need for commercial banks that can provide capital for the private sector," Farid Maqsudi, the founder of the Afghan International Bank, said. "Any bank with the right management and good corporate governance will do great here."

Most of the banks are owned by foreign regional investors or Afghan business people, with only one bank owned by a Western institution, Britain's Standard Chartered, which set up shop in Kabul in January 2004.

Standard Chartered's profits before taxes here increased by 1027% in 2005. Profit margins have slimmed since then to 20% growth in 2008, according to Standard Chartered's finance manager for the country, Touray Saihou. Transactions remain limited to cash management, deposits, investments in government Treasury bills and interbank placing because the upper house of the Parliament is still debating on how to regulate lending. Saihou is confident that the law will pass by this September and that borrowers will arrive. A mortgage law was recently passed.

"Despite all the challenges, banking is a profitable venture in Afghanistan," says Saihou.

For the Ghazanfars, potential profits outweigh the risks. The oil-rich family invested $10 million in the enterprise, the minimum capital requirement set by the Afghan Central Bank. "We plan to make a profit after one year," Yadav says.

Relying on 30 years of experience at the Indian Bank Canara and two years of consulting for the profitable Trade Bank of Iraq, Yadav hopes to mimic the Iraqi success nationally. The bank will lend money at a rate of 15% to 16%, pay 6% the most on deposits and earn a net-interest margin of 10%. "We are going to be conservative and won't lend to anyone without assets," Yadav said. Wall Street, take note.