Islamic finance in Afghanistan

Bloomberg has an interesting article on the proposal to allow Islamic banks in Afghanistan. It would certainly have a market with the large Muslim population in Afghanistan. However, I foresee problems that could impact both Afghanis and the Islamic finance industry for a growing (albeit small) Islamic banking market in Afghanistan.

The first problem is whether creating commercial Islamic banks as a concept in a country that is still largely at war and where regulation is likely to be difficult (at best) will pose problems. It is not that Islamic banks require more supervision than conventional banks, but even in relatively stable societies, early experiments with Islamic banks have seen unscrupulous people come in promising to provide Shari'ah-compliant banking only to create "affinity fraud" (e.g. the various Ponzi schemes in the 1980s in Egypt that were promoted as Islamic banks). This is always a problem (for example, the alleged Sunrise Equities fraud in Chicago, Illinois), but in a country where the central government (let alone banking regulators) have limited control over some areas, it could become a serious problem. If this type of fraud became commonplace, it could create a general suspicion of "Islamic" banking generally and could hinder the growth of the industry if the country stabilizes.

The second is whether Islamic banking, by virtue of light regulation from a distant central bank and national center of regulation, could become captured by people who use it as a way to launder money or otherwise fund terrorism, either by the Taliban or other groups. This would create "evidence" (note the quotes around the word) that Islamic finance is nothing but a form of covert jihad that the anti-Islamic finance groups could use to try and discredit Islamic finance globally and use to limit the growth of Islamic finance particularly in the US and Europe (and also East Asia).

I would hope that my concerns would prove baseless, but being in the United States, I am well attuned to the "anti-Islamic finance" tactics (absent facts, they have gotten a lot of traction using just baseless insuinuations about connections between Islamic finance and terrorism, at least politically). If it is possible (and desired), I would wish for a thriving Islamic finance industry in Afghanistan, integrating both commercial and investment banks as well as microfinance institutions. This could be a fantastic way for the world to channel finance towards the rebuilding of the country and poverty reduction efforts in a country that has seen too much destruction and poverty since the Soviets invaded in the 1980s. However, it has to be done in a way that will benefit Afghanistan and not create "bad apple" examples of either lax regulation or fraud that could limit Afghani's or other countries' regulators enthusiasm for Islamic finance.