The first bank in the modern sense in Afghanistan was established in April 1931 when Banke Millie Afghan (Afghan National Bank) was established. During its first eight years, this privately-owned institution served as a mono-bank for the country, combining central banking activities with commercial operations. In 1939, DAB was formally founded as a state owned central bank. In 1948, the Mortgage & Construction Bank was established as the first specialized bank, followed in 1955 by the Agricultural Development Bank. The same year, Pashtany Tejaraty Bank (Pashtun Commercial Bank) was started in response to the growing needs for trade finance. The 1970s was a dynamic period for the Afghan financial sector with the launching of the Industrial Development Bank of Afghanistan in 1973 and the Export Promotion Bank in 1975 with an increasing number of branches being set up in the main regional centers. However, as the political system was decisively moving to the left during that decade, the private banks were socialized during 1974–76. During the subsequent period of Soviet control of Kabul (1980–88), DAB and the banking system as a whole were transformed into the Soviet model. The victory of the Mujahiddin over the Soviet-backed government and the establishment of Interim Islamic Government in Afghanistan in April 1992 triggered a new phase of volatile conditions with an intensified civil war. During the period of Taliban control from about September 1996 to November 2001, conditions stabilized but DAB and the banking system were never allowed to play their normal roles. The Taliban regime was basically cash-based and as it did not print banknotes, it had very limited recourse to central bank financing. On the other hand, DAB continued in a limited way to carry out certain commercial banking operations, such as the issuing of letters of credit.

1. Hazrat Gul Totakhil
M2014036
hazratkhan02@hhu.edu.cn
Business School of Hohai University,
China
International Finance

2. Monetary System
• International finance is the branch of economics that studies the dynamics
of monetary system, exchange rates, foreign investment, global financial
system, and how these affect international trade. It also studies
international projects, international investments and capital flows, and trade
deficits. It includes the study of futures, options and currency swaps.
International finance is a branch of international economics.
• A monetary system is the set of institutions by which a government provides
money in a country's economy. Modern monetary systems usually consist of
mints, central banks and commercial banks.
• the process by which the monetary authority of a country controls the
supply of money.

3. What is Money?
• Money is the set of assets in an economy that people regularly use to buy
goods and services from other people.
• Money is a good that acts as a medium of exchange in transactions.
• Without money, trade would require barter, the exchange of one good or
service for another.
THE FUNCTIONS OF MONEY
Money has three functions in the economy:
• Medium of exchange
• Unit of account
• Store of value

4. Function of Money
• Medium of Exchange
 A medium of exchange is an item that buyers give to sellers when they want
to purchase goods and services.
 A medium of exchange is anything that is readily acceptable as payment.
• Unit of Account
 A unit of account is the yardstick people use to post prices and record debts.
• Store of Value
 A store of value is an item that people can use to transfer purchasing power
from the present to the future.
• Liquidity
 Liquidity is the ease with which an asset can be converted into the
economy’s medium of exchange.

5. The Kinds of Money
 Commodity money
Commodity money is money whose value comes from a commodity of which it is
made. Commodity money consists of objects that have intrinsic value as well as
value in their use as money.
 Examples: Gold, silver, Diamond
 Fiat money
Fiat money is currency which derives its value from government regulation or law.
 Without intrinsic value
 Examples: Coins, currency, check deposits.

6. Money in Afghanistan Economy
• Currency is the paper bills and coins in the hands of the public.
• Demand deposits are balances in bank accounts that depositors can
access on demand by writing a check.

7. The Central Bank
• The Da Afghanistan Bank is the central bank of Afghanistan. It regulates all
the banking and money handling operations in Afghanistan. The bank currently
has 147 branches throughout the country, headquarters is located in Kabul.
 It is designed to oversee the banking system.
 Formulate, adopt and execute the monetary policy of Afghanistan.
 Hold and manage the official foreign exchange reserves of Afghanistan.
 Print and issue Afghani banknotes and coins.
 It regulates the quantity of money in the economy.
 Accept foreign bank applications from banks that wish to operate in
Afghanistan.
 Act as banker and adviser to, and as fiscal agent of the State.

8. Open Market Operation (OMO)
• An open market operation (OMO) is an activity by a central bank (Da
Afghanistan Bank) to buy or sell government bonds on the open market
• During inflation DAB sells securities in the open market which leads to
transfer of money to DAB. Thus money supply is controlled in the economy.
• During printing of new currency notes by DAB .If more new notes are
printed it will increase the supply of money thereby increasing demand and
prices.
• Thus during Inflation, DAB will stop printing new currency notes thereby
controlling inflation
• During Inflation the DAB will issue new currency notes replacing many old
notes.
This will reduce the supply of money in the economy

9. Exchange Market/ Rate in Afghanistan
• Foreign exchange is the mechanism by which the currency of one country
gets converted into the currency of another country.
• Foreign exchange is the art and science of international monetary
exchange.
• Foreign exchange market is that market in which national currencies are
traded for one another.
• The major participants in this market are commercial banks, forex
brokers, and authorized dealers and the monetary authorities.
• The currency of Afghanistan is Afghani (AFN)

10. Foreign Exchange Rate (Afghani)

11. Balance of Payment
• The balance of a payment is a systematic record of all its monetary
and economic transactions with other countries of the world over a
specified period of time.
• The BOP provides detailed information about the supply and demand
of the country’s currency.
 Balance of Payment Accounts
 Current Account
 Capital Account
 Financial Account
 Official Reserve Account
 Net Errors and Omission Account

12. Balance of Payment

13. Current Account of Afghanistan
• Includes all imports and exports of goods and services
• Records flows of exports, imports, investment income, and
international financial transfers
• Current Account = Exports-Imports
• CA = X-M

14. Export Proportion (in %)
10%
18%
22%
20%
11%
19%
0%
5%
10%
15%
20%
25%
Iron
Copper
Fruits
Row Cotton
Coal
Others

15. Import Proportion (in %)
14%
22%
15%
17%
12%
20%
0%
5%
10%
15%
20%
25%
Petroleom
Machinery
CapitalGoods
Foods
Textiles
others

16. Current Account (CA = X-M)
2008 2009 2010 2011 2012 2013 2013
Current Account (Billion) -1.673 -1.893 -2.795 -3.583 -7.286 -2.706 1.341
-1.673 -1.893
-2.795
-3.583
-7.286
-2.706
1.341
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2

17. Capital Account
• on receipts side, short term and long-term capital inflow receipts of foreign
direct investment and foreign debts are posted.
• Capital transfers related to the purchase and sale of fixed assets such as
real estate
• The capital account is composed of Foreign Direct Investment (FDI),
portfolio investments, and other investment.
• Direct investment involves acquisitions of controlling interests in foreign
businesses.
• Portfolio investment represents investment in foreign shares and bonds
that do not involve acquisitions of control.
• Other investment includes bank deposits, currency investment, trade credit.

18. Current A/C and Financial/ Capital A/C
-$8
-$6
-$4
-$2
$0
$2
$4
2008 2009 2010 2011 2012 2013 2014
Current account Financial/capital account

19. Current A/C and Financial/ Capital A/C