Afghanistan’s money exchangers are the economy’s last best hope

Taliban forces entered the Afghan capital at 3pm on 15 August. By 5:30pm, 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 defence 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 neighbouring 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 non-functional."

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.

 Nafay Choudhury, a Jeremy Haworth Research Fellow at the University of Cambridge.

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.