Law students and lawyers in Afghanistan are filing reports with JURIST on the situation there after the Taliban takeover. Here, a Staff Correspondent for JURIST in Kabul comments on the country’s banking crisis, currently complicated by international restrictions and sanctions. For privacy and security reasons, we are withholding our Correspondent’s name. The text has been only lightly edited to respect the author’s voice.

The Taliban-led central bank, Da Afghanistan Bank, recently declared that the country’s banking sector will resume normal operations soon. The central bank is making such a claim while the liquidity crisis has forced commercial banks to default on payments to customers even within the central bank’s own limits.

Whether the banking sector will return to normal depends on a number of factors such as liquidity, consumer confidence, international banking restrictions, interest rate, and the general economic outlook. However, considering the situation on the ground and the current economic crisis, it seems to me that the central bank’s claim is just an empty promise to the public.

The first and most significant disruption to Afghanistan’s banking sector has been a severe lack of liquidity—i.e. there is insufficient cash available for the banks to meet their short-term obligations. Banks are currently lending less than 14 percent of their deposits to the private sector and are increasingly unable to fully return customer deposits.

Normalizing bank operations requires that liquidity be injected into the system so that banks can first repay deposits of customers upon request. The freezing of Afghanistan’s foreign exchange reserves has prevented the central bank from repaying foreign currency debts owed to commercial banks, which in turn has exacerbated the liquidity crisis and has created a vicious cycle making such repayments almost impossible. Resolving the liquidity crisis is dependent on the release of foreign exchange reserves and a significant increase in the Taliban-led government’s income, which is not easily achievable.

Secondly, speaking of vicious cycles, the liquidity crisis and the restriction on cash withdrawals from banks have tanked the already low public trust in the country’s banking sector. After the fall of the government, Afghan banks have been hit hard by rapid withdrawals from customers and have been forced to freeze accounts. People are queuing outside banks in long lines while being hit hard themselves by depreciation in the Afghani currency. In some cases, customers with foreign currency accounts are being paid back in Afghani at less than the exchange rate, eroding public trust even further.

Thirdly, restrictions imposed by foreign countries have not helped the situation. Establishing connections with international commercial banks is a critical step toward normalizing the country’s banking system and resume activities such as money transfers and investing in foreign banks. However, that requires compliance with international anti-money laundering laws and curbing of terrorism financing both within Afghanistan and wherever Afghanistan’s commercial banks are located. Furthermore, adhering to the principles and guidelines of policy-making bodies and international overseers, such as the Financial Action Task Force (FATF), is critical to Afghanistan’s banking relations with the rest of the world.

The US Treasury Department‘s restrictions and suspension of the Afghan central bank’s plans with the Financial Action Task Force, the US Treasury itself, the US Federal Reserve, and the International Monetary Fund have severely harmed Afghanistan’s banking relations with the rest of the world.

These restrictions are likely to continue unless a government in Afghanistan is recognized by the UN and world powers such as the US, UK, and the EU. No nation, including those sympathetic to the Taliban, have so far recognized its government and there are growing concerns about terrorism, drug trafficking, and the Taliban’s links to regional and international terrorist groups. I sincerely doubt that Afghanistan’s banking relations with the international community will return to “normal” under such circumstances.

Fourth, let us not forget the issue of interest rates. Loans, savings deposits, and long-term deposits in Afghan banks currently consider and apply the concept of interest. However, with a religious extremist group such as the Taliban in power, banks will have to abandon the conventional banking model and implement the Islamic banking model. Interest, as a concept, has no place under the Islamic banking model.

Finally, there is the subject of the general economic outlook, which I am sorry to say is very bleak. Factors such as the nonrecognition of the Taliban government, high unemployment, poverty, widespread human rights violations, the prevalence of fear, drought, and lack of electricity contribute to that bleak outlook. People do not have sufficient income to deposit in banks, there is no demand for bank loans from the private sector and banks have no incentive to invest.

Not to mention that Afghan banks are currently facing a significant personnel challenge. Many trained banking personnel have been forced to flee the country in search of safety and a better future for their children. In the absence of qualified personnel who know what they are doing, neither the central bank nor any other bank for that matter can properly conduct banking activities and the central bank will simply be incapable of regulating, monitoring and reforming the nation’s financial sector. How banking activities can return to “normal” under such circumstances is beyond me.