Supreme Council of Da Afghanistan Bank Announces Moratorium on Licensing of New Commercial Banks.
Da Afghanistan Bank, Kabul, June 7, 2010, The Supreme Council of DAB---the highest decision making body of the central bank--announced a moratorium on licensing of new commercial banks at the end of its first quarterly meeting of SY1389 today.
The Supreme Council reached this decision because of the meteoric growth of the banking sector from just two state-owned banks in 2003 to 17 licensed banks to date.Since the passage of the new banking law in 2003 the banking sector has exhibited tremendous dynamism, technological innovation and become more competitive and much financially stronger. The Chairman of the Supreme Council and Governor of Da Afghanistan Bank Mr. Abdul Qadir Fitrat noted that the banking sector had the lowest non-performing loans (NPL) ratio in the region and capital adequacy levels well above international regulatory norms.
Notwithstanding these impressive achievements, the Supreme Council had decided that a cooling-off period was warranted so that banks could achieve full operational efficiency and consolidate their finances. The cooling-off period would also provide the central bank with sufficient time to train its staff in sophisticated risk-based supervision techniques. In another momentous decision, the Supreme Council announced measures to strengthen the corporate governance of commercial banks. Governor Fitrat announced that the Supreme Council had decided that henceforth, board members were to refrain from the day-to-day management of commercial banks. World-wide experience had shown that shortcomings in the corporate governance of banks, such as when a major shareholder acts as the Chief Executive Officer, can destabilize the financial system and pose systemic risks to the real economy. International best-practice required that Board members focus on guiding, approving and overseeing the bank’s strategic objectives, corporate values and polices and refrain from micro-managing bank operations.
Turning to the economic outlook, Governor Fitrat reported that economic growth in Afghanistan was one of the highest in the world at 22 percent in SY1388. Agriculture was the key driver of economic growth as favorable rains spurred agricultural output to a record-high 53 percent. The construction and services sectors also performed well in response to increased security spending by national and coalition forces. GDP growth is projected to remain strong at 11 percent in the current year.
With respect to the central banks statutory responsibility to deliver price stability, Governor Fitrat noted that the conduct of monetary policy had been highly successful in bringing core inflation down to 2.9 percent in May 2010 from about 10 percent in May 2008. Headline inflation was in negative territory for much of the past year but was now approaching positive territory-which was a positive sign of price developments in the economy. Governor Fitrat reiterated the Supreme Council’s commitment to maintaining price stability in the range of 3-5 percent through the prudent use of its two instruments which are capital notes and foreign exchange auctions.
Governor Fitrat noted with satisfaction that the central bank had steered interest rates from about 18 percent in 2008 to about 3 percent to date. In response to the decline in interest rates the Supreme Council had decided to narrow the interest rate corridor from +/- 3.5 percent to +/-1 percent around the 28 day capital note yield. This action was taken to ensure that commercial banks had ready access to liquidity for their operations and received real rates of return on required reserves.