Afghanistan’s Money Exchangers Are the Economy’s Last Best Hope


By Nafay Choudhury 

As many banks are forced to close, an informal network of money exchangers provides an indispensable service.

 

Taliban forces entered the Afghan capital at 3 p.m. on Aug. 15. By 5:30 p.m., the group had already secured the country’s central money exchange market, Sarai Shahzada. The market is the financial hub of the country, where the equivalent of hundreds of millions of dollars move between hands each day. On a normal afternoon, its trading floor resembles a bustling stock market, with exchangers hustling back and forth for the best currency prices.

Money is certainly on the Taliban’s mind. As the Taliban tightened its grip on the country’s financial system, the United States announced that it had frozen some $9.5 billion in assets of Da Afghanistan Bank, the country’s central bank, stored in the Federal Reserve Bank of New York. The International Monetary Fund (IMF) and World Bank likewise halted dispersal of hundreds of millions of dollars of loans and other aid allocated to the cash-strapped country. Since these foreign funds support more than 75 percent of public spending in Afghanistan, the Taliban—and the country—are facing a financial crisis.

Afghanistan’s central money exchange market may be the country’s last defense against impending financial disaster. Exchangers have supported the Afghan economy for the past two centuries, even during periods of crisis. And if Da Afghanistan Bank and the international community give them the support they need, they will continue to play a crucial role in ensuring that businesses stay afloat and money continues to circulate in the country.

Money exchangers—locally called sarrafs—operate like one-person credit unions. Beyond exchanging currency, they provide a wide range of financial services: They store money for safekeeping and help facilitate the movement of goods between Afghanistan and neighboring countries by providing traders with bills of credit and transferring funds through an informal system called hawala.

The formal banking sector has gained limited traction due to competition with exchangers and the sheer poverty of the country’s population. The first Afghan bank, Bank Millie, established in 1933, provided only rudimentary services such as savings accounts for government elites. Da Afghanistan Bank was created in 1939. By the 1970s, six banks were operating in the country, but growth was cut short by the communist reign from 1978 to 1992, when foreign trade was assumed by the state, reducing demand for bank financing by private traders. Civil conflict in the 1990s only made matters worse. By 2002, the World Bank described Afghanistan’s banking sector as “physically destroyed, technologically outdated, and operationally nonfunctional.”

But while the banks floundered, the exchange market adapted to the drastic variations in political regimes. Although individual exchangers have been persecuted at times—especially those from the Hazara minority under Taliban rule—as an institution, money exchanging has never faltered.

In 1957, four Afghan Jews established the current location of Kabul’s central exchange market, and by 1973, the market had grown to 35 shops, most run by Afghan Hindus and Sikhs. While the communist regime reduced demand for services from exchangers, their networks withstood government interference, and Afghans persecuted by the regime used exchangers to pay smugglers who helped them to escape the country.

In the 1990s, the exchange market transformed in two important ways. First, Afghan Hindu and Sikh exchangers emigrated, mostly to India, due to widespread persecution. “As a result, the Muslim sweepers or servants of those exchangers became exchangers themselves,” one senior exchanger told me. These new exchangers quickly reforged financial networks and expanded them to new areas across the country and globally. Second, with the banking system in tatters and the country under international sanctions, the market’s activities swelled. During the Taliban’s rule from 1996 to 2001, Sarai Shahzada became the hub of all money-related matters in the country; it was so busy you couldn’t walk through it without elbowing others.

After the Taliban fell in 2001, developing a functioning banking sector became a key undertaking of international state-building efforts. The IMF helped usher in a fledging banking system, which it closely monitored over the years. Yet exchangers were widespread while banks had limited capabilities, so banning or replacing exchangers was not feasible. Afghan banking regulators thus pursued the next best strategy by requiring exchangers to hold government licenses.

By 2010, 17 banks were operating in Afghanistan. Bank holdings increased from $261 million in 2004 to $4.26 billion in mid-2010. Then, scandal hit: That year, it was discovered that Kabul Bank, a private bank, was siphoning funds to its executives and Afghan government officials, revealing the weak oversight of the country’s banks. Although the banking sector remained afloat, its reputation was tarnished, and banks became more conservative in their lending. According to the World Bank, for the past decade, Afghanistan’s bank loan to GDP ratio has been one of the lowest in the world.

The exchange market also changed after 2001. When the Taliban fell, exchangers for a time provided the only functioning financial network. The international community started development projects across Afghanistan and had no choice but to rely on money exchangers to move funds to remote provinces. At a rate previously unfathomable, funds flooded the central exchange market, which swelled from 200 shops to more than 400. The market also organized its affairs to protect itself from an encroaching state: Exchangers developed their own management structure, which even hosts a private court that resolves disputes between exchangers.

Exchangers’ autonomy has attracted suspicion over money laundering and supporting the opium trade. In the 1990s, the Taliban financed their activities through the opium trade, and exchangers helped them move funds across borders. Even now, some exchangers continue to facilitate money laundering and the transfer of illicit opium proceeds, which Afghan and U.S. officials have occasionally cracked down on. Yet most exchangers deal with mundane, if under-regulated, market transactions.

Over the past two decades, exchangers have also supported the banking sector. To prevent inflation, the country’s exchange rate has been controlled through a central bank auctioning system, in which U.S. dollars are sold for local afghani currency. The central bank depends on exchangers for this auction because their strong economic networks can quickly disburse U.S. dollars to businesses across the market. They can also take risks that banks would not, as the loans they provide are often based on trust. My research on the exchange market in 2019 revealed that the volume of Sarai Shahzada’s loans is roughly double that of commercial banks. (Smaller exchange markets also exist throughout Kabul and in other major cities, further increasing the volume of exchangers’ loans).

The Taliban takeover—and the tremendous stress it puts on the economy—affects the exchangers in two opposing ways. On the one hand, deteriorating security will cause some to depart the market. Some have already sent their families abroad and, like many Afghans, are seeking to flee the country. Deteriorating security also reduces investment, which in turn hurts the private sector, including exchangers. The volume of the entire system’s transactions will take a hit for the foreseeable future. Moreover, if the Taliban regime has no access to central bank reserves or international aid, it will be choked off from the foreign funds that stabilize the value of the afghani. Exchangers in turn will be deprived of the U.S. dollars they depend on for their businesses, with cascading effects for the entire economy.

On the other hand, conflict also creates opportunities. Many of the Afghan hopefuls who crowded Kabul’s international airport last week unfortunately were unable to escape. Those remaining in the country will continue to require imported goods. Shipments by truck from Pakistan have recommenced at the Torkham crossing, and these traders will need exchangers to finance their businesses. Afghans abroad will also require a functioning hawala network to support family members in the country. As one exchanger remarked to me in recent days: “Exchangers will continue in any way. They are just waiting for the situation to get better.”

Money exchangers will thus remain indispensable, particularly as the financial sector contracts and some banks are forced to close. Their global financial network will ensure that the country is connected across borders. And by taking calculated risks under unstable financial and security conditions, they will be able to provide basic financial services to millions of Afghans and play an important role in dampening the economic crisis.

However, even exchangers cannot fully offset frozen government assets and shrinking foreign assistance. If Washington seeks to support the Afghan people, it will have to engage in discussions with the Taliban on the calculated release of funds into the economy. Foreign dollars from the United States and international organizations will be crucial in allowing the exchange market to resume its activities. Importantly, the international community must not be alarmed over any increased reliance on informal exchangers, which it may associate with the illicit movement of funds or the descent of the financial system. On the contrary, that reliance may be an indication that the Afghan economy has a fighting chance.

 

The article was first published in Foreign Policy on September 7, 2021.

 

Nafay Choudhury is a Jeremy Haworth Research Fellow at the University of Cambridge. He is also a postdoctoral fellow at the University of Toronto and a research fellow at the Afghan Institute for Strategic Studies.

 

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The article does not reflect the official opinion of the AISS.

 

 



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