An operational model of Islamic banking for Afghanistan: prospects and challenges

Abstract

The banking system plays an important role in economic growth and development through the process of financial intermediation. A well-established banking system is the backbone of an effective economic system. However, the lack of confidence in the banking system, uncertainties and obstacles faced by people in Afghanistan let them to rely mostly on informal banking system such as Hawalah, which is based on trust and reputation. As reported only 3-10 percent of the Afghanistan population have accounts with banks and the rest relying on Hawalah system. Afghanistan with its more than 99 percent of Muslim population is a potential country for Islamic banking. As for now, only 7 private banks are offering selected Islamic products via window. The purpose of this study is to propose a suitable model of Islamic banking institutions for Afghanistan. A combination of qualitative and quantitative research approach was used to get a better understanding of the issues. The qualitative data were collected via interviews while quantitative data through questionnaires. The SPSS software was applied and the data were analyzed in accordance with the research questions. The findings revealed high demand for Islamic banking in Afghanistan and with regards to the hypothesis of this research, the dual banking model of Malaysia was proposed as suitable model for Afghanistan.