Chairman’s Report

Unfortunately, we do not see significant improvements in the overall situation in Afghanistan going into 2018. Hence, the Bank will continue to maintain a conservative position for the foreseeable future.

AIB’s success continues to be driven by its reputation for integrity, good governance, and attention to customer needs. Our position as the most respected financial institution and the bank of choice in Afghanistan has become stronger over time.

In 2017, the Board and management continued to pursue the strategic agenda developed over the past several years. Following is a summary of the progress the Bank has made during 2017 against these objectives:

Achieve world-class standards in anti-money laundering and financial crime compliance

In 2017, with the assistance of an external consultant, management continued to improve implementation of policies and procedures involving these compliance functions. Staff training continued during the year, as well as monitoring to ensure procedures were followed. The Compliance Committee was also established. The full Board received quarterly reports on key indicators regarding this programme. The project team will continue into 2018 as there is more work to be done. As one can imagine, implementing world-class procedures in AML and FCC affects AIB’s staff and our customers. In 2018 management will bolster the Compliance Department’s capabilities to act as a second line of defence for this important function.

Complete the new head office building in June 2017

Unfortunately, due to a number of circumstances beyond the Bank’s control, the head office building was delayed beyond the June target date. However, staff will begin to move into the new building in March 2018. This will be a major milestone in the Bank’s development as this building will reflect the important position AIB holds in the banking system in Afghanistan.

Focus on organisation and human resource development

This initiative continued to be a key long-term priority, with the objective of developing the capabilities and competencies of senior Afghan staff to replace expatriate management over the next three to five years, and to generally build staff competencies across the Bank. To this end, several senior Afghan staff have been promoted to executive positions with increased responsibilities. We continued to overhaul personnel administration, job descriptions, and job grading, and to put in place a comprehensive succession planning programme. All senior management had staff training and development objectives in their annual goal statement.

Position for the future in underserved markets and product offerings: Shariah banking, small business banking, and electronic banking

This initiative is intended to position AIB in the small business and consumer segments in the long term. There has been uplift in business as a result of actions taken by management over the past year, and we expect to see increased business especially in Afghani currency deposits and Shariah loans. A lending programme for small businesses met with moderate success, mainly due to reluctance of businesses to borrow. This initiative is basically an investment in the future.

Maintain existing correspondent banking relationships and develop new relationships for US dollar clearing

AIB continued its correspondent banking relationship with Standard Chartered Bank during the year. At this point, we see no threat to that relationship; however, management has stepped up the search for another correspondent bank. This is not easy due to Afghanistan’s poor risk profile among international banks. Management has begun to open direct accounts with banks in major trading partner countries to serve customers’ payment needs in those countries.

Maintain financial stability and satisfactory returns

AIB had a successful financial 2017 and our forecast for the next three years shows slightly higher profitability, mainly stemming from our very strong fee-based business (49 percent of AIB’s revenues are from fees and foreign exchange activities).

During 2017, the Board had several changes in its composition and membership:

Veronica John resigned from her director position on 31 December due to ill-health. We were particularly saddened to learn of her death in January 2018. Ms John made an invaluable contribution to AIB over 14 years. The shareholders, Board, and management offer our heartfelt condolences to her family, and record our appreciation for her tenure as a director.

Salman Shoaib resigned from the Board during 2017. Mr. Shoaib served on the Board for five years from 2012 and was chair of the Investment Committee. I thank him sincerely for his contribution to the Board and the Bank.

Samuel Sidiqi and Hugo Minderhoud joined the Board as directors in late 2017. Messrs Sidiqi and Minderhoud bring extensive governance and banking experience to the Board.

The Investment Committee was folded into the Planning and Strategy Committee to streamline meetings and the Board structure.

The Audit Committee will be joined by Mr. Minderhoud to strengthen its oversight role.

As a result, the Board will have six members and five committees going into 2018: Risk, Remuneration, Nominating, Planning and Strategy, and Audit. The activities of these committees are highlighted in another section of this report.

The Board met 12 times in 2017: four inperson meetings and eight conference calls. In particular, the Board focused on the strategic agenda mentioned above, as well as closely monitoring the security situation in the country.

The Board and senior management undertook a three-year strategic planning exercise during 2017. A three-year time horizon was chosen due to the political, security, and economic uncertainties in the country. A longer horizon involved too much guesswork under the circumstances. Key points in the plan are:

Afghanistan will continue to get by over the next three years, although the overall situation in the country will not provide much economic growth. However, this provides an opportunity for AIB to consolidate its position as the leading bank by addressing selective market opportunities and continuing to strengthen internal capabilities:

Take market share in lending from weak competitors

Invest in segments that have potential future growth, for example, small and mid-sized companies

Build external and internal capabilities for improving service to customers and strengthening systems, processes, and people skills

Internally, investment in staff training is a key area of focus over the three years.

Building the Audit Department’s capability to become the third line of defence for management and the Board is another priority for management, in line with international best practice.

Finally, the plan calls for achieving 15 percent return on equity.

The final terms and conditions for the Internal Finance Corporation (IFC) to purchase a 7.5 percent stake in the Bank from existing shareholders was completed in late 2017, and shares were exchanged between the shareholders in November. The IFC will invest another 7.5 percent through the issuance of new shares. This second investment will take place within the next two years.

Other highlights of 2017 include:

For the sixth consecutive year The Banker magazine voted AIB ‘Best Bank in Afghanistan’. We are proud of this honour, which reflects the professionalism of the Bank.

For the fifth consecutive year, AIB was recipient of the prestigious ‘Best Corporate Governance – Afghanistan’ award from the London-based Capital Finance International organisation.

For the third year, AIB took a stand at the SWIFT International Banking Operations Seminar (SIBOS) held in Toronto, Canada.Two of the Bank’s Afghan staff attended the conference, in addition to our CEO,
Mr. Barned. At the conference, several international banks expressed interest in working with AIB in a variety of ways.

As I noted earlier, it is unclear whether conditions in Afghanistan will improve in 2018. Each year I find myself stating the same cautious words about the political, security, and economic conditions in Afghanistan. However, that is the reality of the situation. 2018 appears to be no different.

In closing, I would like to again thank the staff of the Bank as well as my fellow Board members and shareholders for their support and dedication to the institution.