LAW OF BANKING IN AFGHANISTAN ProvisionalTranslation of Banking law of Afghanistan Translated by USAID/BearingPoint/Banking Reform Team/Dated 12/14/2003 Legislative and Regulatory Section/DAB Contents Page Chapter I GENERAL PROVISIONS................................................................................5 Article 1. Principal definitions......................................................................5 Article 2. Prohibited activities and sanctions................................................8 Article 3. Public consultation procedure for banking regulations..............10 Article 4. Treatment of foreign interest in domestic banking activities.....11 Article 5. Immunity from suit.....................................................................12 Chapter II LICENSES AND PERMITS...........................................................................12 Article 6. Banking licenses and permits.....................................................12 Article 7. Applications for banking licenses and permits; fees..................13 Article 8. Licensing procedure for companies that are not yet established14 Article 9. Licensing procedure for existing companies..............................16 Article 10. Procedure to obtain permits for subsidiary and representative offices of Bank.................................................................................................17 Article 11. Cooperation with foreign bank regulator....................................18 Article 12. General conditions for issuing a banking license or a permit.....19 Article 13. Register of banks........................................................................22 Article 14. Revocation of banking license or permit....................................22 Article 15. Revocation of banking license or permit upon request..............26 Article 16. Publication of decisions to revoke banking license or permit....27 Chapter III ORGANIZATION, OWNERSHIP AND ADMINISTRATION.....................27 Article 17. Creation of banks........................................................................27 Article 18. Legal structure of banks..............................................................28 Article 19. Charter and by-laws…………………………………………….28 Article 20. Capital structure of banks………………………………………29 Article 21. Restrictions on qualifying holdings in banks..............................29 Article 22. Administrative structure of banks...............................................33 Article 23. General Meeting of Shareholders...............................................33 Article 24. Board of Supervisors..................................................................36 Article 25. Management Board.....................................................................38 Article 26. Audit Committee.........................................................................38 Article 27. Ineligibility of administrators.....................................................39 Article 28. Disclosure of commercial interests.............................................40 Article 29. Secrecy obligations.....................................................................40 Article 30. Reorganization of banks.............................................................41 Article 31. Restrictions on holdings of banks...............................................41 Chapter IV OPERATIONAL REQUIREMENTS..............................................................44 Article 32. General banking principles.........................................................44 Article 33. Banking activities.......................................................................45 Article 34. Prohibited activities....................................................................46 ProvisionalTranslation of Banking law of Afghanistan Translated by USAID/BearingPoint/Banking Reform Team/Dated 12/14/2003 Legislative and Regulatory Section/DAB - 2 - Article 35. Prudential requirements..............................................................47 Article 36. Relations between banks and their customers............................50 Article 37. Payment of debt in advance of maturity.....................................51 Article 38. Secured debt................................................................................51 Article 39. Records of transactions and commitments.................................52 Article 40. Bank credit to related persons.....................................................53 Article 41. Prevention of banking services in support of crime...................54 Chapter V ACCOUNTS, REPORTS AND INSPECTION...............................................55 Article 42. Accounts, financial statements, and statistical reports...............55 Article 43. Audit...........................................................................................57 Article 44. Publication of financial statements and auditor's report.............58 Article 45. Reports and inspection................................................................58 Chapter VI ENFORCEMENT MEASURES......................................................................61 Article 46. Preventive actions.......................................................................61 Article 47. Plan to take corrective action......................................................61 Article 48. Orders to take prompt corrective action.....................................62 Article 49. Hearings......................................................................................64 Article 50. Temporary orders........................................................................65 Article 51. Issue, effect and termination of orders to banks.........................66 Article 52. Authority of Da Afghanistan Bank.............................................68 Chapter VII CONSERVATORSHIP...................................................................................68 Article 53. Grounds for appointment of a conservator.................................68 Article 54. Appointment of a conservator.....................................................69 Article 55. Effects of the appointment of a conservator...............................70 Article 56. Taking control of the bank..........................................................71 Article 57. Notice, review and appeal...........................................................72 Article 58. Report of the conservator and plan of action..............................73 Article 59. Moratorium.................................................................................74 Article 60. Termination of conservatorship..................................................74 Chapter VIII REHABILITATION OF BANKS...................................................................75 Article 61. Rehabilitation procedures...........................................................75 Chapter IX LIQUIDATION OF BANKS...........................................................................76 Article 62. Voluntary liquidation..................................................................76 Article 63. Forced liquidation.......................................................................77 Chapter X RECEIVERSHIP OF BANKS.........................................................................79 Article 64. General bnkruptcy law does not apply to banks.........................79 Article 65. Grounds for opening bankruptcy proceedings............................79 Article 66. Petition for opening bankruptcy proceedings.............................80 Article 67. Appointment of conservator.......................................................80 Article 68. Tribunal hearing..........................................................................81 Article 69. Grounds for rejecting the petition...............................................81 ProvisionalTranslation of Banking law of Afghanistan Translated by USAID/BearingPoint/Banking Reform Team/Dated 12/14/2003 Legislative and Regulatory Section/DAB - 3 - Article 70. Rejection of frivolous petitions filed by bank creditors.............82 Article 71. Forced liquidation if bankruptcy petition is rejected..................83 Article 72. Bankruptcy decision...................................................................83 Article 73. Service and publication of bankruptcy decision.........................83 Article 74. Receiver......................................................................................84 Article 75. Powers of the receiver.................................................................85 Article 76. Effect of bankruptcy decision.....................................................85 Article 77. Finality in payment and securities settlement systems...............87 Article 78. Transfers of bank shares and bank liabilities..............................88 Article 79. Property report............................................................................89 Article 80. Registration of claims.................................................................90 Article 81. Admission of claims...................................................................91 Article 82. Set off and netting.......................................................................93 Article 83. Termination of current contracts................................................94 Article 84. Negotiated settlements................................................................95 Article 85. Secured claims............................................................................95 Article 86. Priority of payments....................................................................96 Article 87. Liquidation plan..........................................................................96 Article 88. Rehabilitation of bankrupt banks................................................98 Article 89. No compromise with creditors....................................................98 Article 90. General meeting and committee of creditors..............................98 Article 91. Immediate advances to depositors..............................................98 Article 92. Distribution.................................................................................99 Article 93. Bankruptcy proceedings against a domestic branch office or a domestic representative office of a non-resident bank................99 Article 94. Banks cross border bankruptcy.................................................101 Article 95. Consultations between the Financial Services Tribunal and Da Afghanistan Bank.......................................................................101 Article 96. Termination of bankruptcy proceedings...................................102 Chapter XI FINAL PROVISIONS...................................................................................102 Article 97. Regulatory autonomy of Da Afghanistan Bank........................102 Article 98. Standards of good administration.............................................103 Article 99. Transitional provisions.............................................................103 Article 100. Repeal of existing laws and regulations...................................104 Article 101. Entry into force.........................................................................104 ProvisionalTranslation of Banking law of Afghanistan Translated by USAID/BearingPoint/Banking Reform Team/Dated 12/14/2003 Legislative and Regulatory Section/DAB - 4 - CHAPTER I GENERAL PROVISIONS Article 1. Principal definitions Wherever used in this Law, the following terms shall have the following meanings: "administrator" means any person who is a member of the Board of Supervisors, the Management Board or the Audit Committee of a bank, and for any office of a bank “administrator” shall mean any officer of the bank assigned to work at that office; “Afghanistan” means the Islamic State of Afghanistan; "bank" means a person engaging in the business of receiving money deposits or other repayable funds from the public for the purpose of making credits or investments for his own account; “bank holding company” means a company that is regulated by the bank regulator of the country where it maintains its head office and that has one or more subsidiaries with banking licenses; "banking license" means an indefinite authorization issued by Da Afghanistan Bank granting the right to a company to engage in the business of receiving money deposits or other repayable funds from the public and extending credits or investments for its own account; "banking activities" means the activities that are listed in Article 33; "branch office" means a place of business forming a legally dependent part of a bank where all or some banking activities are conducted; for the purposes of this Decree Law, all domestic branch offices of a non-resident bank shall be treated as a -5- single branch office; all communications from Da Afghanistan Bank to any such branch office may be validly made to the branch office notified by the non-resident bank to Da Afghanistan Bank or failing such notification to a branch office selected by Da Afghanistan Bank; "credit" means any disbursement or commitment to make a disbursement of a sum of money in exchange for a promise to repay of the amount disbursed and to pay interest or other charges on such amount, whether secured or unsecured; any extension of the due date of a debt; any guarantee issued; and any purchase of a debt security or other promise to pay sum of money and to pay interest either directly or by a discounted purchase price; "debt security" means any negotiable instrument of indebtedness and any other instrument equivalent to such instrument of indebtedness, and any negotiable instrument giving the right to acquire another negotiable debt security by subscription or exchange; negotiable debt securities may be in certificated or in book-entry form; “deposit” means a sum of money paid to a person and credited to a current account or to a savings deposit account maintained with that person, terms under which the deposit will be repaid or transferred to another account, with or without interest or a premium, either on demand or at a time or in circumstances agreed by or on behalf of the depositor and that person; “domestic” when applied to a juridical person means a juridical person whose head office is located in Afghanistan, and when applied to an office means an office whose principal place of business is located in Afghanistan; -6- “dormant account” has the meaning given in Article 36; “fit and proper person” means a person who may be regarded as honest and trustworthy and whose professional qualifications, background and experience, financial position, or business interests do not disqualify that person in the judgment of Da Afghanistan Bank to be an owner, administrator or conservator of a bank; no person shall be regarded as a fit and proper person if he has been convicted by a criminal court of an offense for which he was or could have been sentenced to imprisonment without the option of a fine unless such sentence was or would have been motivated by his religious or political views or activities, or if he has been declared bankrupt by a court of law, or if he, on grounds of personal misconduct unrelated to his religious or political views or activities, has been disqualified or suspended by a competent authority from practicing a profession; "Da Afghanistan Bank" means the central bank of Afghanistan; “Financial Services Tribunal” and “Tribunal” mean the Financial Services Tribunal established by Article 108 of the Law for Da Afghanistan Bank; “non-resident” when applied to a juridical person or office means a juridical person or office that is not a domestic juridical person or office; “person” means a natural person or a juridical person, or both; “qualifying holding” means a direct or indirect holding in an undertaking which represents 10 percent or more of the capital or the voting rights or which makes it possible to exercise significant influence over the management of the undertaking in which the holding subsists; -7- “representative office” means a place of business forming a legally dependent part of a bank where no deposits or other repayable funds may be received from the public; "subsidiary" means any juridical person in which another person or group of persons acting in concert holds the equivalent of fifty percent or more of the voting shares, or a qualifying holding that permits such other person or group of persons to exercise effective control over the management or policies of the juridical person in which the holding subsists. Article 2. Prohibited activities and sanctions 1. No person shall engage in the business of receiving money deposits or other repayable funds from the public for the purpose of making credits or investments for his own account in Afghanistan without a banking license issued by Da Afghanistan Bank, other than a person listed in paragraph 2. 2. The following persons shall be exempt from the requirements of this Law: 1) persons licensed and supervised pursuant to legislation of Afghanistan other than this Law to receive deposits or other repayable funds from the public for the purpose of making credits or investments for their own account in Afghanistan; 2) persons who fund the credits they make exclusively from non-repayable capital subscriptions and the proceeds of credits received from financial institutions or debt securities issued in the capital markets; and -8- 3) persons who, by virtue of the nature or size of their business or the origin of their resources, are exempt by Da Afghanistan Bank from the requirements of this Law; exemptions so granted by Da Afghanistan Bank may be conditional or limited in time, or they may be partial and list certain provisions of this Law that shall apply to the person receiving the exemption. 3. No one shall use the word "bank" or derivatives of the word "bank" in respect of a business, product or service without a banking license issued by Da Afghanistan Bank, unless such usage is established or recognized by law or international agreement, or unless it shall be clear from the context in which the word "bank" is used that it does not concern banking activities. Representative offices shall not use the word “bank” in their name, except in cases where the word “bank” forms an integral part of the name of the bank to which they belong, provided that the word “representative office” is added. Banks whose banking license has been revoked shall carry in their name the words “bank in liquidation.” 4. Da Afghanistan Bank shall be empowered to enter the offices and to examine the accounts, books, documents and other records of any person if Da Afghanistan Bank determines that there are reasonable grounds to suspect that such person engages in activities that are incompatible with the preceding provisions of this Article 2; immediately upon the request of Da Afghanistan Bank, law enforcement officials shall, if necessary by use of force, assist Da Afghanistan Bank to gain access to the premises of such person and to examine the accounts, books and other records of such person. 5. If Da Afghanistan Bank determines that a person engages in activities that are incompatible with the preceding provisions of this Article 2, Da Afghanistan Bank shall serve an order upon that person promptly to cease such activities. If Da Afghanistan Bank determines that, within one calendar week from the date of service of its order, the activities have not ceased, Da Afghanistan Bank shall apply to the Financial Services Tribunal and the -9- Tribunal may upon such application decide that the assets, books and records of that person be seized and secured by Da Afghanistan Bank. Within one calendar week following the date of its decision, the Tribunal shall commence hearings concerning the matter in which shall participate Da Afghanistan Bank, the person addressed by the order of Da Afghanistan Bank, and such other interested parties as the Tribunal may invite. Upon conclusion of the hearings, the Tribunal shall either decide upon the liquidation of the assets of that person in accordance with Article 63 or lift the seizure and decide if and to what extent, Da Afghanistan Bank must pay damages to such person as determined by the Tribunal. In case of a liquidation, the proceeds of liquidation shall be used to pay judicial expenses and other costs of Da Afghanistan Bank, depositors and other creditors of the person concerned, in that order of preference, while any remaining assets shall be transferred to their owner or be forfeited to the State. Article 3. Public consultation procedure for banking regulations 1. If Da Afghanistan Bank proposes to issue a regulation pursuant to this Law, it shall publish a draft of the proposed text of the regulation in the manner appearing to it to be best calculated to bring the proposed regulation to the attention of the domestic banking industry. The draft shall be accompanied by an explanation of the purpose of the proposed regulation and a notice that comments about the proposed regulation may be made to Da Afghanistan Bank within a specified time of not less than one month after the date of publication of the draft. 2. In preparing the final text of the regulation, Da Afghanistan Bank shall have regard to any comment made to it in accordance with paragraph 1. If the regulation is issued, Da Afghanistan Bank shall publish an account in general terms of the comments made to it in accordance with paragraph 1 and its response to them. If the text of the regulation differs from -10-