Chairman’s Report
I am pleased to report that 2014 was a very good year for Afghanistan International Bank (AIB), given the uncertain political, economic, and security environment that was the nationwide norm over the period.
Net income before tax at year-end exceeded AFN 563 million ($9.7 million at current exchange rates), capital adequacy ratio was 14.94 percent, and return on equity stood at 15.9 percent. More important, total deposits grew by 17 percent to AFN 52.90 billion ($907 million) – just short of our target of being a $1 billion institution.
We believe several factors are attributable to this deposit growth: a flight to safety by customers; AIB’s ability to offer US dollar clearing through our correspondent banks – a distinct competitive advantage; and providing better customer service than our competitors.
Our 2014 financial performance showed significant improvement over weaker than normal results in 2013. The two cases that led to the Bank having to make significant reserve provisions in 2013 are now under control. Management is taking aggressive measures to recover the funds owed to the Bank and expects a positive resolution in the near future.
As stated in my report last year, the Board of Supervisors is focusing on four priorities: corporate governance, operational excellence, customer satisfaction, and financial stability. Additional measures have since been undertaken in each of these priorities. In terms of corporate governance, initiatives were:
- A rewrite of the Articles of Association, completed in April, that better defines the responsibilities of shareholders, directors, and management. The amended Articles have been submitted to the Central Bank for approval.
- A Deputy Chief Executive Officer (DCEO), Guy Mallett, was hired in the early part of 2014. The DCEO’s role is to manage the internal operations of the Bank, specifically customer-facing activities and back-office operations. Mr Mallett has extensive banking experience and will be a candidate to replace the current CEO on his retirement in early 2015.
- The Board reviewed and commented on a new head office organisation structure proposed by management. This structure will focus the Bank’s resources on customers and their banking needs.
Management conducted a survey to identify ways to improve customer satisfaction. As a result, several initiatives were undertaken, including reducing queue times in branches and streamlining transaction processing. Customer service also benefited from implementation of a new version of our core banking platform.
This new system provides additional capabilities including a Shariah banking module, enabling the introduction of a fully compliant Shariah banking unit during the year. We are optimistic that this initiative will be well received by the market.
Due to the uncertain situation in Afghanistan, business sentiment was cautious in 2014. To ensure that the Bank could respond to adverse events should they occur, a contingency plan was developed that defined specific actions to be taken in the event of a material downturn in the business. This plan was developed by management under the guidance of the Planning and Strategy Committee of the Board. Fortunately, none of the contingency actions had to be undertaken. However, loan volume did suffer from the economic uncertainty in the market and non-performing loans did have an uptick, albeit not significantly.
One of the main challenges facing the banking system in Afghanistan is the related issues of anti-money laundering (AML) and violation of sanctions. As regulators have taken increasingly tough positions in penalising banks for violations in these two areas, major international clearing banks are scrutinising their correspondent relationships to ensure that they are AML and sanctions compliant.
As a result, these clearing banks are terminating relationships with their non-compliant correspondents all over the world. Afghanistan is no exception, and major international banks have closed their US dollar accounts for all private Afghan banks except AIB. We have been able to continue relationships with our two clearing banks due to our stringent adherence to meeting AML and sanction requirements. Some of the pressure in this regard was helped by the Government of Afghanistan signing the international AML accords. Management and the Board are working diligently to maintain our correspondent relationships as well as search for new relationships. AIB plans to commission outside experts in 2015 to conduct analysis and evaluation of compliance systems and procedures relating to anti-money laundering, sanctions, and terrorist financing.
AIB’s plan to build a Head Office with suitable space to meet the Bank’s growth requirements over the foreseeable future took a major step forward in 2014. The shell of the building is scheduled for completion towards the end of 2015. Construction of the frame will be followed by mechanical, electrical, and plumbing works. All going well, the Head Office will be completed in 2016.
Before the next phase begins, however, management and our contractors will review the building’s design to ensure that high-security protection is incorporated.
In recognition of AIB’s governance model and operational excellence, we were awarded ‘Best Bank of the Year, Afghanistan 2014’ by The Banker magazine, the third successive year we have received this award. And, Corporate Finance International selected AIB for its ‘Best Corporate Governance, Afghanistan’ award.
Further international recognition came in a silver award from the League of American Communications Professionals for the overall design and content of AIB’s 2013 annual report, and a gold award for ‘Best Letter to Shareholders’.
With their purchase of the Afghanistan Investment Partners Corporation’s (AIPC) 25 percent stake in AIB and a portion of the Asian Development Bank’s (ADB) holdings, Wilton Holdings and Horizon Associates now each own 46.25 percent of AIB, with ADB retaining 7.5 percent.
The reductions in ownership were made in accordance with each organisation’s objectives and do not reflect concerns regarding AIB’s soundness. ADB plans to continue its current level of ownership for another three years. Mr Gokan Erkal (AIPC’s shareholder representative) stepped down from the Board in early 2014 and we take this opportunity to thank him for his contributions.
As 2015 unfolds, we are guardedly optimistic that the banking environment in Afghanistan will improve. This view is driven by two factors: the successful elections and peaceful transition of government during 2014, and the signing of the security agreement with the United States and European countries. These events should help to stabilise the country and improve economic conditions as aid agencies are likely to continue their support of the Afghan government.
As in the past, I extend my personal thanks and gratitude to my fellow Board members and the management and staff of AIB for their hard work, diligence, and dedication to making the Bank the successful institution it has become.
Ronald Stride
Chairman