Central Bank Drives Islamic Banking Growth at Bahrain Conference

The Central Bank of Afghanistan is pioneering a major transformation in the nation’s financial sector, championing a shift toward Islamic banking that aligns with the nation’s cultural and religious values. This vision was highlighted at the 19th meeting of the Organization for Auditing and Accounting of Islamic Financial Institutions (AAOIFI) in Bahrain. Leading the Afghan delegation, Central Bank head Noor Ahmad Agha emphasized the bank’s commitment to Islamic banking growth, aiming to establish a stable and ethically grounded financial system that would benefit Afghanistan’s economy.

Islamic Banking in Afghanistan

Afghanistan’s focus on Islamic banking growth reflects a broader, global shift in the financial landscape. With increasing demand for ethical, interest-free banking alternatives, the Central Bank of Afghanistan views Islamic finance as an essential means of fostering economic stability and inclusivity. In his address at the Bahrain meeting, Agha called upon global stakeholders for collaborative support, highlighting the need for Afghanistan to tap into the extensive experience of countries like Malaysia, Saudi Arabia, and the United Arab Emirates, all leaders in Islamic finance.

Haseebullah Noori, spokesperson for the Central Bank, explained, “Islamic banking growth in Afghanistan is not only a financial initiative but a way to align our economy with the values of the Afghan people. This shift will encourage greater participation in the financial system by increasing trust in banks and providing an ethical alternative to conventional finance.”

The Global Rise of Islamic Banking

Islamic banking has emerged as a fast-growing sector within the global financial industry. According to recent reports from the Islamic Financial Services Board (IFSB), the Islamic finance industry is projected to exceed $3 trillion by 2025, driven by rising demand across regions with substantial Muslim populations, including Southeast Asia, the Middle East, and South Asia. This growth reflects a trend toward ethically aligned finance that prioritizes transparency, risk-sharing, and socially responsible investments—principles inherent to Islamic finance.

The expansion of Islamic finance is particularly prominent in countries like Malaysia, which has a robust regulatory framework and deep-rooted experience in managing Islamic financial institutions. Afghanistan’s Central Bank views Malaysia’s success as a model for building its Islamic banking framework. By learning from Malaysia and other leaders in the field, Afghanistan aims to develop a regulatory system that aligns with the globally recognized AAOIFI standards.

Why Islamic Banking Matters?

For Afghanistan, Islamic banking offers a way to build a resilient financial sector that resonates with the values of its predominantly Muslim population. Unlike conventional banking, Islamic finance prohibits interest (riba) and engages in profit-and-loss sharing arrangements, which many Afghans find more compatible with their beliefs. With nearly 99% of Afghanistan’s population identifying as Muslim, Islamic banking has the potential to foster public trust in the financial sector, encouraging broader economic participation.

This focus on ethical finance is particularly crucial for Afghanistan, which has faced prolonged conflict and economic instability. Economic inclusion has remained a challenge, with a significant portion of the population lacking access to formal financial services. By establishing a transparent, Shariah-compliant banking system, the Central Bank hopes to include previously unbanked populations, including rural communities and women, who traditionally face barriers to financial inclusion.

Lessons from Regional Leaders?

The Bahrain conference was a pivotal opportunity for Afghanistan to engage with experts from leading Islamic finance markets. Countries such as Saudi Arabia, Malaysia, and the United Arab Emirates have achieved significant success in Islamic finance, offering Afghanistan valuable insights into building an effective and resilient financial infrastructure. These countries have robust frameworks that balance Islamic principles with regulatory standards, creating a safe and productive environment for Islamic banking to thrive.

Economic affairs expert Abdul Nasir Rashtya commented, “Afghanistan’s engagement with these global leaders in Islamic finance is crucial. The experience of countries like Malaysia demonstrates the importance of a strong regulatory framework and well-trained professionals. Afghanistan stands to gain from their expertise, especially in navigating the challenges of transitioning from a conventional to an Islamic banking system.”

To ensure a smooth transition, Afghanistan will need to establish a legal framework that governs Islamic financial practices. This requires the development of regulations for Islamic contracts, such as Murabaha (cost-plus financing), Mudarabah (profit-sharing), and Ijarah (leasing), which are core components of Shariah-compliant finance. By aligning with global standards, Afghanistan’s banking sector can gain credibility and attract investors from around the world.

Afghanistan’s Skill Gap

One of the key takeaways from the Bahrain conference was the need for capacity-building programs to support Afghanistan’s transition to Islamic banking. Currently, the country faces a shortage of skilled professionals in Islamic finance, which could hinder its ability to develop and implement an effective system. Recognizing this gap, the Central Bank has been advocating for educational and training programs that can equip Afghan professionals with the necessary skills.

The Central Bank’s spokesperson stated, “Building capacity in Islamic finance is essential for Afghanistan’s success. We need professionals who understand the intricacies of Shariah-compliant finance and can help implement the regulatory framework. By collaborating with international Islamic finance institutions, we hope to bridge this skill gap and establish a workforce capable of supporting Islamic banking growth.”

Several Islamic finance institutions have pledged their support to Afghanistan by offering technical assistance and training programs. This collaboration is expected to provide Afghan banks with the knowledge and tools required to operate within the principles of Islamic finance, ensuring that Afghanistan’s banking sector can effectively serve its population.

Afghanistan in the Malaysia Forum

In addition to the Bahrain conference, Afghanistan’s Central Bank delegation participated in the International Forum on Islamic Economics and Finance in Malaysia, where discussions focused on the role of Islamic finance in economic development. The forum highlighted the importance of financial inclusivity, particularly for small and medium enterprises (SMEs), which play a vital role in Afghanistan’s economy.

SMEs in Afghanistan face numerous challenges, including limited access to financing, which hinders their ability to expand and create jobs. By adopting Islamic finance solutions tailored to the needs of SMEs, the Central Bank aims to foster economic growth and entrepreneurship in the country. Shariah-compliant financing options, such as Mudarabah and Musharakah (joint ventures), are especially suited for SMEs, as they provide risk-sharing mechanisms that align with Islamic principles.

The Malaysia forum underscored the potential of Islamic finance to drive inclusive economic development, a priority for Afghanistan. “Supporting SMEs through Islamic finance is a key objective for us,” explained Haseebullah Noori. “By offering Shariah-compliant financing options, we can empower local businesses to grow, create jobs, and contribute to Afghanistan’s economic stability.”

Islamic Banking Growth

The growth of Islamic banking in Afghanistan has the potential to transform the country’s economy. By providing an alternative to conventional banking, Islamic finance can attract foreign investment, particularly from countries with established Islamic finance sectors. Experts suggest that Afghanistan’s move toward Islamic banking could position it as an emerging market within the global Islamic finance industry, appealing to investors seeking Shariah-compliant opportunities.

The shift to Islamic banking is also expected to address economic inequality. By promoting risk-sharing and ethical investment, Islamic finance can foster a more inclusive economy, enabling underbanked populations in Afghanistan to access financial services. This inclusivity is especially significant for women and rural communities, who often face barriers to accessing traditional financial institutions.

Afghanistan’s Financial System

Trust and transparency are central to the success of Islamic banking in Afghanistan. A well-regulated Islamic financial system that prioritizes fairness and accountability can foster greater public confidence in Afghanistan’s banks. The Central Bank has recognized the need for a regulatory framework that aligns with AAOIFI standards, which are widely respected within the Islamic finance industry.

The International Monetary Fund (IMF) has highlighted governance and transparency as critical factors for the stability of Islamic finance systems. In its report on Islamic finance, the IMF emphasizes the importance of robust governance structures that ensure consumer protection and operational integrity. For Afghanistan, adhering to these principles will be vital in building a financial sector that resonates with public values and expectations.

By committing to transparency, Afghanistan’s banking sector can attract both domestic and international trust. This trust is crucial for fostering economic growth, as it encourages Afghan citizens to engage with the formal financial system. Moreover, transparency can also attract foreign investment, as investors are more likely to engage with a system that upholds high standards of accountability.

Overcoming Challenges

While the benefits of Islamic banking growth are clear, Afghanistan faces several challenges in implementing this transformation. The country’s banking infrastructure remains underdeveloped, and a lack of skilled professionals poses a significant obstacle. Additionally, Afghanistan’s legal framework must be adapted to accommodate Shariah-compliant financial practices, which require specialized contracts and regulatory oversight.

To address these challenges, Afghanistan is seeking support from international Islamic finance institutions. The Islamic Development Bank (IsDB), for instance, has expressed its willingness to assist Afghanistan in building regulatory capacity and developing the necessary infrastructure. This support is expected to play a critical role in facilitating Afghanistan’s transition to Islamic banking.

The Central Bank has also emphasized the importance of public awareness and education. For Islamic banking to succeed, the Afghan population must understand the principles of Shariah-compliant finance and feel confident in its benefits. By launching public awareness campaigns and partnering with local religious leaders, the Central Bank hopes to foster a culture of trust and acceptance of Islamic finance.

A New Era for Afghanistan

Afghanistan’s commitment to Islamic banking growth reflects a vision for a more stable, inclusive, and ethically grounded financial system. As the Central Bank collaborates with global Islamic finance leaders, Afghanistan is laying the foundation for a financial sector that aligns with the cultural and economic needs of its people.

This transformation is not only an economic initiative but a step toward aligning Afghanistan’s financial system with the values of its population. By focusing on capacity-building, regulatory frameworks, and partnerships, Afghanistan is positioning itself as a promising player in the global Islamic finance industry. While challenges remain, the support of international partners and a dedicated vision offer a pathway toward sustainable growth and economic resilience.

Islamic banking growth presents a unique opportunity for Afghanistan to engage with a global network of ethical finance. As Afghanistan seeks stability and growth, Islamic banking offers a promising path forward—one that is rooted in trust, transparency, and the shared values of its people.