A study of credit risk management for commercial banks of Afghanistan

Abstract

This research is designed to study potential of credit risk and its mitigation tools for conventional and Islamic financial products offer by commercial banks in Afghanistan. We have tried to identify several types of inherent credit risks faced by commercial banks and suggested various credit risk mitigation tools and instruments. The data was obtained from primary and secondary sources. The primary sources for this research are survey questionnaire, structured interviews and bank annual reports which were used in our data collection. The secondary sources include journal articles, books, reports, and theses. The survey questionnaires were designed to explore respondents’ perception towards credit risk inherent in Islamic and conventional financial products and their mitigation tools currently used by commercial banks. The sample size of primary data included 25 respondents representing five commercial banks. Furthermore, for the contextual description of inherent credit risk in commercial banks of Afghanistan, qualitative in-depth interviews were conducted with the officials of five selected commercial banks. The data analysis has indicated that credit risk in conventional financial products is mostly mitigated by collateral arrangements, guarantees and credit insurance program. While as per the nature of Islamic financial products and their inherent credit risks, the credit risk mitigation tools varies from one product to another. Finally, we have found that Islamic financial products are subjected to higher credit risk compare to conventional modes of financing in Afghanistan.