CEO’s Management Review

Assets increased by 4.7 percent to AFN 60.93 billion (2016: AFN 58.19 billion), bringing compound annual asset growth since 2010 to 15.18 percent. The increase was led by a 4.0 percent rise in deposits to AFN 56.26 (AFN 54.08 billion). Commercial lending was subdued throughout the year.

Revenue increased by 13 percent to AFN 2.27 billion (AFN 2.02 billion). Non-interest income accounted for 49 percent of total revenue, the growth being led by the 37 percent increase in outward international transfers to AFN 3.03 billion from AFN 2.22 billion in 2016.

The volume of outward transfers grew to 31,500 transactions, while AIB also received 37,500 inward transfers totalling AFN 2.37 billion. Together, these transactions underline the value of strong correspondent partnerships and sound regulatory compliance.

Active management of the Bank’s bond portfolio also contributed to growth, generating revenue of AFN 0.36 billion. Total revenue was also assisted by the liquidation of real estate collateral for just under AFN 0.32 billion, even though loan recovery was negatively affected by the arduous and very lengthy process for foreclosure and obtaining vacant possession.

Operating expenses increased by 20 percent, as was anticipated when preparing the budget, driven by: additions to executive management and engagement of new staff in expectation of opening the new head office branch; increased costs relating to compliance and professional advisors (44 percent); and a rise in security costs (28 percent).

With both revenues and expenses being in line with budget, the Bank was able to achieve a 14 percent increase in pre-tax profit to AFN 0.646 billion (AFN 0.567 billion). Net profit showed a reduction of 31 percent to AFN 0.358 billion (AFN 0.519) following a one-off income tax provision based on the assessment order for the financial years 2012, 2013, and 2014. Included is one major business expense related to a Department of Justice action in the USA (see note 14.1), not allowed as a deductible expense by the tax department of the Ministry of Finance. The Bank considers this ruling arbitrary in nature and has filed an appeal which is still pending.

Subject to approval at the annual general meeting, the final dividend will be AFN 0.42 billion (interim: AFN 0.412 billion), bringing total distribution to shareholders to AFN 0.832 billion for the year. This equates to dividend per share of AFN 27.73.

Total equity after payment of the interim dividend decreased by 2.0 percent from AFN 3.90 billion to AFN 3.84 billion. Our capital adequacy ratio of 15.42 percent and 65.92 percent liquidity ratio are very satisfactory by domestic and international standards.

Business initiatives

Despite a quiet year for generating new loans in corporate and institutional banking, we were able to participate in a number of development projects by providing performance guarantees and other related support to international construction companies. These totalled AFN 3.74 billion, relating to 14 projects including roads, railways, and telecommunications.

Our Business and Community Banking units, which are responsible for the small and middle market segment as well as development finance, signed a $25 million memorandum of understanding with the Afghanistan Industrial Association to support local production and manufacturing companies, using conventional and Islamic structures. I am pleased to be able to mention here that with excellent collaboration between the Bank’s lending units and our Shariah banking unit, we are experiencing a significant increase in requests for Shariah-compliant loans.

To assist our customers with their international trade transactions, we have Standard Chartered Bank as our major international clearing bank, as well as correspondent banking relationships with State Commercial Bank of Turkmenistan and Asaka Bank in Uzbekistan. The latter support bilateral trade with two major trading partners, and we are also working towards a correspondent relationship with a British bank and a Russian bank.

Having experienced slow loan growth through much of the year, in the last quarter AIB developed a product to promote borrowing among medium-sized manufacturing companies where previously the cost and collateral requirements made access to loans challenging.

AIB introduced loans of AFN 7 million to AFN 35 million at 7.5 percent annual interest, designed to promote local products and encourage manufacturers to expand and create more jobs. The facility is available only in Afghani currency as a term loan of up to three years, payable in monthly instalments. These loans are guaranteed by the Afghan Credit Guarantee Foundation (ACGF), established with funding from the German government and USAID and subsequently from the World Bank, to facilitate access to finance for Afghan small and medium enterprises. ACGF’s participation allows AIB to reduce both its interest rate and collateral requirement.

As I indicated earlier, AIB’s loan portfolio did not expand in 2017. AIB believes that one reason for this is that Da Afghanistan Bank, the central bank, is over-regulating the banking sector. A typical example is the focus on collateral as the primary requirement for loan approval. AIB believes that collateral requirements should be a decision for the Bank’s Board and management – for example, enabling loans to exporters who have no need to own real estate and are therefore unable to provide collateral.

Although our commercial lending departments were relatively quiet, Consumer Banking implemented a series of initiatives designed to enhance customer care and add to the ease and simplicity of doing business with AIB.

Extended opening hours – from 8am to 8pm – now apply at four branches, one in Kabul and three in provinces (Mazar, Herat, and Kandahar). We also plan to open a ‘smart’ branch in Kabul where all cash activities will be handled by interactive teller machines (ITMs) – the modern version of the traditional ATM. Fast-deposit and pay-in counters have also been established in large branches and all ATMs are now equipped with anti-skimming protection. Added functionalities include inter-account transfers and cash deposits.

One centralised portal has been established for customer feedback, and all customer-facing employees were trained by an outsourced company in how best to facilitate customer needs. A new quality control team is now responsible for customer service improvement.

Electronic banking advances included e-commerce activation, enabling MasterCard acceptance on customers’ websites. Consumer loan applications and card modifications are now available online.

We also launched a new Islamic credit card and introduced in-house printing and personalisation of all cards (chip and magstripe), speeding production and the turnaround time for delivery to customers. A new agreement with the World Food Programme enables direct payment to beneficiary families through a pre-paid card.

As in previous years, AIB undertook a thorough review and upgrade of crucial business operations, adopting the ‘three lines of defence’ approach based on best-practice policies and procedures for anti-money laundering, compliance, and internal audit. We have furthered strengthened our resources and capabilities in these areas, largely based on the 2015 guidelines for corporate governance stipulated by the Basel Committee on Banking Supervision.

The guidelines state that a risk governance framework should include well-defined organisational responsibilities for risk management, typically referred to as the three lines of defence:

The business line

A risk management function and a compliance function independent from the first line

An internal audit function independent from the first and second lines

In conjunction with an internationally recognised expert – formerly global head of financial crime compliance for correspondent banking with a major international bank – we also focused closely on updating and improving data quality for ‘know your customer’ requirements and financial crime compliance. An anti-bribery and corruption policy was also developed and approved by the Board.

Further activities under the broad heading of rigorous compliance included installing new and more sophisticated software for transaction monitoring and comprehensive screening. This interfaces with our core banking system, analysing all daily entries and comparing them with certain benchmarks to check for irregularities.

Enhancements to corporate governance include a management information system for the Board of Supervisors and correspondent banks, generating detailed reports so that our improvements can be monitored quarterly, while the launch of an 18-month programme for financial crime compliance will enhance our capabilities even further. Together with risk tolerance measures for financial crime compliance, the Board carefully monitors and checks that the Bank conforms with requirements in every way.

Overall, these activities have helped achieve our goal of a high level of compliance implementation and control, especially in terms of the demanding requirements that are now imposed by our correspondent banks.

The Bank also participated in a number of domestic and international exhibitions and seminars. Domestically, we presented lending products to the top 70 Afghan traders and exporters, at the invitation of USAID to the US embassy, and also participated in a round table with HE Eklil Hakimi, Afghanistan’s Minister of Finance, again presenting AIB lending products and services to traders and entrepreneurs. Wider community involvement extended to sponsoring conferences such as Business Expo, Youth to Business Forum, and the Afghanistan Industrial Festival.

Internationally, AIB was again represented at SIBOS, the annual conference, exhibition, and networking event organised by SWIFT for the financial industry. Held in Toronto, the event was an excellent opportunity to refresh existing relationships and establish new ones.

We also represented Afghanistan at the International Chamber of Commerce’s Trade Finance Conference in London on a panel discussion of ‘Access to Finance in Frontier Markets’.

We also participated in Afghanistan’s 98th Independence Day celebrations in Dubai.

A first for AIB was coverage in The Economist magazine, which carried an article on AIB subtitled ‘The value of a good reputation in a troubled country’. We continue to seek international media coverage, not only for AIB but to improve the image of Afghanistan.

Community

In keeping with AIB’s commitment to good corporate citizenship, we continued to support projects that have a beneficial impact on the communities where we operate. We again contributed to Women for Afghan Women, a New York-based grassroots organisation concerned with human rights and women’s rights in Afghanistan; to the American University of Afghanistan; and to Save the Children, Shamsa Children Village Orphanage, and Amiri Medical Complex.

Closer to home, the Bank has taken many wide-ranging steps to support its female employees, aiming to play a positive role in developing their careers and ambitions. For female staff, AIB has arranged:

Work requirements to ensure that women are able to attend university at the same time as having a job

Transport to and from homes, offices, and universities

A comprehensive childcare system in all offices, freeing mothers to advance their careers

In closing, I take this opportunity to express sincere thanks to our shareholders and Board for their continued confidence and support; to our loyal customers for their patronage; and to our management. To our employees, I offer special thanks for their dedication and hard work throughout 2017 in what was a very challenging environment.