Photographer: Dmitry Kostyukov/AFP via Getty Images

Mortgages Set to Debut in Taliban-Hit Afghan Housing Market

  • Strong demand for mortgage loans among urban renters in Kabul
  • Tiny finance sector ready to expand despite security concerns

Bank-e-Millie Afghan, the nation’s oldest state-run lender, is planning to roll out the country’s first mortgage product as regular attacks from Taliban militants fail to stem a surge in home constructions.

The lender’s plan, to offer loans under Sharia law that prohibits charging interest, is expected to expand the banking sector, boost the amount of cash in circulation and open up access to mortgages to those who strictly adhere to Islam, economists said.

Decades of war and terrorism have wracked Afghanistan’s economy, stifling growth in the nation’s finance industry. While Taliban and Islamic State attacks on civilians have killed or injured more than 8,000 people in the first nine months of the year, the decision by the U.S. to keep troops in the country beyond 2016 and increasing urbanization is prompting people to move from mud houses to brick homes.

The introduction of housing finance will have “a very considerable impact on the country’s fragile economy,” said Aimal Hashoor, a spokesman for Da Afghanistan Bank, the nation’s Central Bank. “The mortgages will help to increase financial services within the banking sector, which will help boost trust between people and the banking industry.”

The nation’s 15 banks, which offer both conventional and Islamic banking products, have just $696 million in outstanding loans and $4.1 billion in assets, according to a report by the central bank. Just 11 percent of country’s 32 million people have a bank account, the report noted.

Stressed economy

The development comes as the nation’s economy labors under significant strain. Per-capita incomes have fallen for four straight years and the International Monetary Fund predicts they will continue to decline this year. The labor market is also stressed, with 39 percent of the population unemployed, according to a report by Kabul-based Central Statistics Organization, Afghanistan.

The majority of Afghans own traditionally-constructed mud houses, while 21 percent of Afghans in urban areas live in rented properties, including a quarter of the four million residents in capital Kabul, the report noted. The nation needs to build 500,000 homes annually to meet demand, the Afghanistan Investment Support Agency said.

“Market demand for mortgage products is conducive to targeting millions of people around the country,” said Ahmad Massoud, an economics Professor at Kabul University, by phone. “Now, people borrow cash from friends or relatives to buy a house in the absence of a mortgage industry.”

Short-term loans

Afghan banks provide short-term loans with an interest rate of up to 20 percent, but no mortgage loans, said Rahimullah Oriakhail, Bank-e-Millie Afghan’s marketing manager, in an interview. 

Once the proposal gains final approval from the Finance Ministry and the Central Bank, expected within the next two months, the initial plan is to tap the market in Kabul, the nation’s largest city, where people surveyed by the bank have shown deep interest in the new Islamic product.

“The bank is considering long-term -- up to 15 years -- mortgage loans to meet market demand,” he said.

The bank will initially purchase a property and then sell it to customers in installments after adding 4 percent on the original value of the property, he said. The borrowers must pay a down payment of at least 10 percent of the value in advance, he said.

“There’s a significant market demand for such a Sharia-compliant loan as many households don’t borrow cash from banks that charge interest rates because this is prohibited in Islam,” said Mohammad Aqa Kohistani, treasury director general at the Finance Ministry. “Putting that cash to our economy will improve both the banking sector and the economy.”

Security challenges

The tiny banking industry boomed as foreign aid poured into the nation, with assets expanding by more than 50 percent a year since 2001 when U.S. forces toppled the Taliban regime. And yet until now the industry has still failed to build trust with the public.

“A worsening security situation and a failure to attract more customers has discouraged banks from a mortgage loan plan,” said Saifuddin Saihoon, an economics professor at Kabul University. “Many people still keep cash in their pillows in many remote areas and even in several central cities.”

Banks have also been a target for the Taliban, which is fighting the government and U.S. forces across much of the country. The group once stormed New Kabul Bank in Jalalabad city, killing many Afghan soldiers who had come to receive salaries. Other than three Pakistani banks, no foreign lenders operate in the war-torn country.

“Mortgage loans will help people such as us, who live in vain to save money and became a house owner,” said Shafiq Ahmad, who has been internally displaced due to war. Ahmad pays $350 -- half his salary -- for a rented three-room flat in downtown Kabul, he said in an interview.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE