The security situation especially was a significant issue for the Bank, in Kabul and in several provincial capitals. Despite these challenges, AIB had a very successful 2016 (as detailed in the CEO’s report). Unfortunately, we do not see major improvements in the overall situation going into 2017. Hence, the Bank will continue to maintain a conservative posture for the foreseeable future.

As I have stated in previous annual reports, AIB’s success continues to be driven by its reputation for integrity, good governance, and attention to customer needs. Our position as the most respected financial institution and the bank of choice in Afghanistan has grown stronger.

We are the leader in deposits (more than 30 percent of all deposits in the banking system), profitability (most profitable bank by far), and return on equity (more than 13 percent, substantially above other Afghanistan banks and the world average for banks). The Board has declared a gross dividend of $5 million based on 2016 results, equal to AFN 11.17 per share.

The Board and management outlined six key strategic objectives for the Bank in 2016:

• Achieve world-class standards in anti-money laundering and compliance

• Complete the new head office building by the end of 2016

• Focus on organisation and human resource development

• Position for the future in under-served markets and product offerings: Shariah banking, small business banking, and electronic banking

• Maintain existing correspondent banking relationships and develop new relationships for US dollar clearing

• Maintain financial stability and satisfactory returns

These objectives are important to the Bank in maintaining its leadership and market positioning. I summarise our progress:

Achieve world-class standards in anti-money laundering and compliance

With the aid of an external consultant, management implemented new systems and procedures for AML. Staff training was completed and a reporting dashboard put in place. The Compliance Committee was also established and an upgraded filtering and transaction monitoring system went live. The Board will monitor performance quarterly.

Complete the new head office building by the end of 2016

Significant progress was made on the building during the year. However, delays in finalising the facade contract resulted in the occupation date being extended to mid 2017.

Focus on organisation and human resource development

This has become a key priority for the Bank, with the objective of developing the capabilities and competencies of senior Afghan staff to replace expatriate management over the next five to ten years and to generally build staff competencies. To this end, the Bank is implementing a customer-focused organisational structure and has promoted several Afghan staff to leadership positions. We are appointing a deputy CEO with a strong business development background to drive market initiatives. Human resource capabilities have been further strengthened in early 2017, by hiring a senior specialist executive to overhaul personnel processes and to put in place comprehensive succession planning.

Position for the future in under-served markets and product offerings: Shariah banking, small business banking, and electronic banking

The Bank initiated several new products and enhanced its electronic banking capabilities during 2016 to better serve small/medium size businesses and consumers. While these initiatives will have limited impact on the Bank’s overall revenues in the near term, they will position AIB for future growth in emerging market segments. This is basically an investment in the future.

Maintain existing correspondent banking relationships and develop new relationships for US dollar clearing

AIB has for many years had US dollar clearing relationships with two international banks: Standard Chartered Bank and Commerzbank. In fact, AIB is the only Afghan bank with direct clearing correspondent relationships. In May we were notified by Commerzbank that they will only handle payments to Germany.

This was a senior management policy decision that affects many banks across Asia. AIB’s Board and management have been actively pursuing other correspondent relationships. However, in this era of sanctions and money-laundering penalties, there are few large international banks willing to take on clearing for emerging market institutions. At this point, we do not believe that our relationship with Standard Chartered Bank is cause for concern.

Maintain financial stability and satisfactory returns

The Board has established a target of at least 13.5 percent for minimum return on equity. Management has implemented a number of cost savings and is continuing to look for opportunities to improve staffing levels, staff efficiency, and business processes – including strengthening the credit process. To help achieve this, a new chief risk officer was hired during the year and we are considering hiring a chief credit officer during 2017.

The Board of Supervisors continued to provide oversight and strategic guidance to management during the year. The Board met 13 times in 2016: four in-person meetings and nine conference calls. In particular, the Board focused on the strategic agenda mentioned earlier, as well as closely monitoring the security situation in the country.

Other notable events during 2016 include:

• For the fifth consecutive year, The Banker magazine voted AIB ‘Best Bank in Afghanistan’. We are proud of this honour, which reflects the professionalism of our Bank.

• For the fourth consecutive year, AIB was recipient of the prestigious ‘Best Corporate Governance – Afghanistan’ award from the London-based Capital Finance International organisation.

• In April, Mr Guy Mallett resigned as CEO due to personal considerations. Mr Mallett had been with AIB for four years in a variety of positions. The Board wishes him well in his future endeavours. Mr Anthony Barned, a long-time advisor to the Bank and also head of the Audit Committee, became CEO. Mr Said Arab Khan, who was a professional auditor partner with KPMG, has taken over as Audit Committee chair. AIB again took a stand at the SWIFT International Banking Operations Seminar, held this year in Geneva, Switzerland. Mr Barned and two of the Bank’s Afghan staff met many banks there who expressed interest in working with AIB in a variety of ways.

• Due to a change in Central Bank regulations, a new Nominating Committee was formed to identify and vet candidates for Board and senior management positions. This committee was very active during the latter part of the year due to three significant senior management appointments, as well as seeking potential Board candidates. There are now six Board committees: Risk; Planning and Strategy; Remuneration, Nominating, Investment, and Audit. Committee activities are highlighted elsewhere in this report.

The Asian Development Bank (ADB) sold its remaining 7.5 percent stake to the other two shareholders, resulting in Horizon Associates and Wilton Holdings each holding 50 percent of AIB. With the planned exit of ADB, Mr Hasib Ahmed, ADB’s shareholder representative since 2005, stepped down from the Board in February. He will be missed due to his knowledge and deep commitment to the success of AIB.

The final terms and conditions for the International Finance Corporation (IFC) to purchase a 15 percent stake in the Bank, once concluded, will be presented to the Afghanistan Central Bank for approval. Under the terms of the agreement, IFC will purchase 7.5 percent from the two existing shareholders and 7.5 percent through the issue of new shares. This investment will take place in two tranches over two years.

In 2012, AIB acquired 100 percent of the operation of Standard Chartered Bank in Afghanistan for $3 million. This amount has been on the Bank’s books as goodwill. However, our current auditor, Ernst and Young, has determined that according to IFRS 3 on Business Combinations, the acquisition should have been carried at fair market value. The resulting revaluation requires AIB to restate our financial statements for 2015 and 2016. There is no material impact on the Bank’s financial position.

As I noted earlier, it is unclear whether conditions in Afghanistan will improve in 2017. Each year I find myself stating the same cautious words about the political, security, and economic conditions in Afghanistan. However, that is the reality of the situation and the prospects for 2017 seem little different.

In closing, I again thank the staff of the Bank as well as my fellow Board members for their support and their dedication to the institution.

Ronald Stride
Chairman