CEO’s Management Review

Assets increased by 17.70 percent to AFN 71.72 billion (2017: AFN 60.93 billion), bringing compound annual asset growth since 2011 to 12.11 percent. The increase was led by a significant growth in deposits, up by 19.77 percent from AFN 56.26 billion to AFN 67.38 billion, underlining the continued confidence in the strength and integrity of the Bank. However, commercial lending was again subdued throughout the year.

Revenue increased by 10.13 percent to AFN 2.50 billion (2017: AFN 2.27 billion). Compound annual revenue growth since 2011 now stands at 11.37 percent. Non-interest income – accounting for 48 percent of total revenue – was a major factor in this growth, as was the 37 percent increase in interest income from the bond portfolio and placements, helped by the increase in US dollar interest rates.

Total guarantees related to contracts with the Afghan government, issued on behalf of customers of international banks, reflected a 40 percent increase – from 25 percent in 2017 to 34 percent (2017: AFN 3.21 billion) in 2018. Together, these transactions underline the value of strong correspondent partnerships and sound regulatory compliance. Total revenue was also assisted by the liquidation of real estate collateral for just under AFN 65 million, although loan recovery still remains negatively affected by the arduous and very lengthy process for foreclosure and obtaining vacant possession.

Operating expenses increased by 14.21 percent, driven by three primary factors: higher costs relating to compliance and professional advisors (46 percent – AFN 43 million); higher security costs (4 percent – AFN 4 million); and increased IT and annual maintenance costs (60 percent – AFN 32.33 million).

In addition to the above, we also incurred expenditure of AFN 48 million with Deloitte to upgrade AML and FCC procedures and systems, offset by the added confidence of our correspondent banks in our compliance standards. Adherence to IFRS 9, the new international accounting standard that became effective from the beginning of the year, resulted in an additional provision of AFN 9 million.

Pre-tax profit showed a marginal increase to AFN 648 million (2017: AFN 646 million), mainly due to the central bank reducing the average interest rate on capital notes from 3.5 percent to 0.4 percent over the space of a single month at the beginning of the year.

Despite this, net profit increased by 34 percent to AFN 478 million (2017: 357 million) as a result of tax benefit from accelerated depreciation of our new head office building and fitting-out costs. Tax was also on the higher side in 2017 due to a one-off tax payment relating to financial years 2013-2015.

Subject to approval by the Annual General Meeting, total distribution to shareholders for the year will be AFN 645 million, equating to a dividend per share of AFN 21.50.

Our capital adequacy ratio of 13.35 percent and 61.01 percent liquidity are very satisfactory by domestic and international standards.

Business initiatives

A primary focus for 2018 was to ensure our AML/FCC systems and procedures met best international practices. In this regard, we engaged Deloitte’s specialist AML/FCC team from Singapore to do a 360-degree review of our procedures and systems, which was then provided to our primary US$ clearing banks. I am pleased to report that AIB was found to have a high level of compliance with the Bank Secrecy Act (BSA) – a US law requiring financial institutions to assist US government agencies in detecting and preventing money laundering.

Meeting BSA and our US$ clearing banks’ requirements means that AIB has more comprehensive customer on-boarding and payment screening than our local competitors, in turn affecting perceptions of our customer service. However, as AIB transacts payments for about $2.5 billion of imports, the Bank is required to assist Afghanistan trading companies.

In 2018, AIB also upgraded its AML/FCC software systems to meet best international practice. We will continue to upgrade in 2019 and take advantage of any improvements introduced by the vendors.

Corporate and Institutional Banking

Despite a quiet year for generating new loans in corporate and institutional banking, we were able to participate in nearly double the number of development projects, providing guarantees and related support to international construction companies. These totalled AFN 3.21 billion, involving 34 projects including roads, railways and telecommunications.

In an initiative to assist exports, AIB took part in the second annual India-Afghanistan International Trade and Investment Show in Mumbai, organised by the US Agency for International Development (USAID) and the governments of India and Afghanistan. The show provided an excellent opportunity for AIB to interact with 400 contractors who signed many deals – ranging from dried fruit to mining, healthcare to energy and information technology.

To help our customers with their international trade transactions, we significantly increased our correspondent bank network. As well as maintaining our long-standing relationships with with major international banks – Standard Chartered Bank and Commerzbank – and with major regional banks such as State Commercial Bank of Turkmenistan and Aska Bank in Uzbekistan, we have now added Crown Agent Bank in the UK, Bank CenterCredit in Kazakhstan, and TransCapital Bank in Russia. The latter will enable AIB to remit payments to virtually all Commonwealth of Independent States (CIS) countries.

Final steps are also being taken towards AIB becoming a member of Citi Worldlink, making us Citibank’s partner in Afghanistan. The agreement was nearing completion at year-end.

Business and Community Banking

We were the first bank in the Afghan market to reduce the interest rate for SME borrowing to 7.5 percent annually, extending the offer in 2019 to support local manufacturer and empower domestic producers. The facility is available only in the AFN currency and has significantly stimulated the creation of new jobs. Since its launch, we have approved AFN 172 million in new loans, of which AFN 100 million has been disbursed with the balance in process.

Having the Afghan Credit Guarantee Foundation (ACGF) back the lending has eased collateral requirements and lowered interest rates for our customers. We signed a new contract for 2019 with ACGF, which is operated by the German government, USAID, and the World Bank. ACGF guarantees range from 36 percent to 72 percent of SME loans, reducing the need for collateral. We have a similar agreement with USAID’s Development Credit Authority for partial guarantees that provide 60 to 65 percent loan coverage.

AIB believes in the importance of women in stimulating economic growth and reducing poverty in local communities and society as a whole. To this end, the Bank sponsors the Afghanistan Women Chamber of Commerce and Industry (AWCCI) to support 850 women entrepreneurs.

We also plan to create opportunities for women, and work to eliminate gender discrimination within the banking sector. AIB is also an active member of the International Chamber of Commerce of Afghanistan, and a member of the International Chamber of Commerce’s Banking Commission for Afghanistan.

Consumer Banking

We have upgraded our internet banking to the latest version. OBDX (Oracle Banking Digital Experience) has several advantageous functionalities, such as understanding the user device and adjusting the platform view accordingly. This makes the system view more attractive and easy to use.

The system also has a corporate module that enables customers to have more than one user under the same account. Full transfer modules enable customers to transfer funds locally and internationally. All transfers within AIB are processed in real time, so that transactions are simultaneously credited to the beneficiary account.

The payroll module gives customers the ability to process their payrolls within AIB or any domestic bank, using a file upload function. This has capacity to process 1,000 transactions within a single file.

Using the enquiry module, customers can review all their account details, backed by Android and iPhone apps that can be downloaded for fully-functional mobile banking. Security is reinforced by finger-print and iris-recognition for log in.

Smart Branches

In response to increasing customer demand for digital banking, and to give prompt and special service, Smart Branches will be placed in shopping malls. These will have advanced technology features, saving customers the need to visit banking halls and eliminating waiting time. The electronic portals at Smart Branches will handle all cash and transfer activities through interactive teller machines.

A cashback scheme encourages customers to switch from counters and tellers to online banking, with a small percentage of the value of total online transactions reimbursed every quarter.

Training and customer service

All customer-facing employees are being trained by an outsourced company in how best to facilitate customer needs. Training is followed by regular reviews, designed to maintain consistent improvement in service at branches.

Debit and credit card applications are now available online as is opening individual, payroll accounts. Upgrading cards to contactless functionality will be available soon. The launch of premium debit cards enables customers to make whatever transactions they need – at ATMs, with point-of-sale machines, or online.

IT initiatives

The information technology focus for the year was based on an expectation of more stringent regulatory requirements for financial crimes compliance and on the increasing sophistication of cyber-criminals. On the business side, we responded to the increased demand for services through mobile and web applications and for financial inclusion.

Major initiatives achieved include the upgrade of the IT backbone and data centre, enhancement of critical financial crimes compliance applications, business facilitating applications, and electronic banking. Redundancy and resilience in our operations have improved – particularly in security – and we have prepared for future business requirements. Consequently, the Bank is in a strong position to meet the ever-increasing demands of its clients and consolidate its market leadership.

We also recognise that data is a critical asset, and that how it is used and protected has a significant impact on service delivery and client confidence. We improved our cyber security capabilities to provide swift detection and remediation of threats as well as strengthening the protective mechanisms. Being aware that the human element is the weakest link in cyber security, we introduced a more comprehensive awareness programme for all employees, resulting in increased understanding of acceptable behaviour and the use of IT resources.

Community involvement

The Bank participated in a number of domestic and international exhibitions and seminars.

Domestically, we organised the Bibi Khadija Award Ceremony in partnership with the Afghanistan Women Chamber of Commerce and Industry. Five successful businesswomen were honoured in five categories. Wider community involvement extended to participating in conferences such as the ePayment Exhibition and the Domestic Product Exhibition.

Internationally, we supported and sponsored the Afghanistan Women Chamber of Commerce and Industry’s top 10 members to participate in the Halal International Business Summit exhibition in Istanbul. AIB was again represented at SIBOS, the annual conference, exhibition, and networking event organized by SWIFT for the financial industry. Held in Sydney, the event was an excellent opportunity to renew existing relationships and establish new ones.

AIB delegations also participated in USAID’s Passage 2 Prosperity event held in Mumbai, supporting Afghan traders to present their products and helping their entry to international trade.

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; funded construction of a gymnasium and sunshade for Maryam High School in Kabul; donated medical equipment to Abdul Hadi Dawee High School; and sponsored young people to attend the business forum run by AIESEC, the world’s largest youth-run organisation.

I take this opportunity to express sincere thanks to our shareholders and Board for their continued confidence and support, and to our loyal customers for their patronage. To our management and our employees, I offer special thanks for their dedication and hard work throughout 2018 and the performance achieved in a very testing environment.