The ire of Afghanistan’s money exchangers exposes the dangers of government reforms

Life seems mostly normal these days in Kabul’s currency-exchange bazaar, Sarai Shahzada. Located in the center of Kabul, the bazaar hosts more than 400 shops, spread over four floors, and facilitates hundreds of millions of dollars in transactions daily. From morning to evening, the money exchangers manning these shops hustle with one another for the best currency prices while transferring funds globally. 

Exchangers execute “hawalas,” a traditional form of money transfer between exchangers in the bazaar and a counterpart located abroad or elsewhere in Afghanistan, including areas controlled by the Taliban. While a single exchanger may have three or four corresponding partners, the combination of all those working in the bazaar creates a vast global network with funds being moved between distant locations in the same day. Exchangers also offer savings accounts to their customers and loans to businesses. Deals are executed by word of mouth, phone chats and WhatsApp messages, with minimal formal documentation.

These familiar routines were interrupted in February when exchangers in the bazaar, joined by their ranks across the country, barred their shops and staged a 16-day strike, the longest protest by exchangers in the country’s history. At the core of exchangers’ ire is the government’s intention to terminate their sole-proprietorship licenses in favor of multi-stakeholder company licenses.

The protest came to an end only when Afghanistan President Ashraf Ghani intervened, agreeing that the government would work with exchangers to find a solution. A similar three-day protest occurred in 2018 when the government tried forcing exchangers to collect information on their clients. Activities resumed when the government agreed to work with exchangers, but without any clear resolution to the problem.

For over a century, exchangers have run their businesses as sole proprietorships. The simple business structure allows exchangers to make decisions within seconds and seize opportunities as they arise. In a country where bank lending is extremely conservative, exchangers provide informal loans and other financial services, thereby preventing the economy from stalling. My extended study of the money bazaar revealed that the volume of loans it provides may be as much as four times that of banks.

The traceless movement of funds is precisely why the central banking authority, Da Afghanistan Bank (DAB), has such difficulty monitoring exchangers. Undocumented transactions may lead to tax evasion, capital flight to neighboring Pakistan and Iran, and even the co-mingling of licit transactions with illicit proceeds from the opium trade. The company license entails a multiple stakeholder corporate structure, which the DAB hopes will produce more transparency and allow it to monitor transactions.

At the core of the present conflict is the question of who should regulate money exchangers. The proposed reforms are based on the belief that market actors should be fully regulated by laws — by and through the state. This vision can be traced to the global state-building discourse, summarized in a set of development directives known as the Washington Consensus, which advocates good governance through the promotion of state regulations. For the government, these new company licenses would bring exchangers increasingly under its watchful eyes.

However, these proposed reforms do not enter a market bereft of any sense of order. On the contrary, the money-exchange bazaar represents a sophisticated community with its own regulations that function apart from the government. The bazaar has its own bylaws, elections, public affairs committee and private court. Exchangers are regulated by their community norms rather than by the state.

Rule of law efforts generally have failed to recognize that the expansion of state regulations may have devastating effects on existing social arrangements. Studies on Afghan village leadership, as well as rural communities in Thailand, have revealed that destroying non-state communities does not automatically make people more reliant on state law; on the contrary, it may leave people without any possibility of redress.

In short, greater state regulation is not a panacea for a country’s governance dilemmas. The community of exchangers wields tremendous authority, and while working with it would require concessions, it represents the government’s best chances of regulating the bazaar. Conversely, a dogmatic insistence on the rule of state law risks undermining order, thereby driving conflict in an already fractured country.

In the shadow of the current peace talks between America, the Afghan government and the Taliban are questions on what a future legal system would look like. Even (or especially) after a peace agreement, multiple centers of authority will exist throughout the country. Maintaining order in such a setting depends less on the government having a monopoly over the rule of law across the country than its ability to work those other centers of authority, such as the money exchange bazaar.

Nafay Choudhury is Jeremy Haworth Research Fellow at St. Catharine’s College, University of Cambridge, and a research fellow at the Institute for Global Law and Policy at Harvard Law School. He is a research fellow at the Afghan Institute for Strategic Studies. Follow him on Twitter @nafayc.