Afghanistan could have a new banking law approved by parliament in a few months including provisions for Islamic products, which may help to draw hundreds of thousands of people into the formal financial sector.

In one of the poorest countries in the world, Afghanistan's government faces a growing fiscal crisis aggravated by a drop in foreign financial aid. An estimated nine out of 10 households in the Muslim-majority nation of 30 million shun interest-based finance, at least partly for religious reasons.

The central bank, Da Afghanistan Bank (DAB), is finalizing a regulatory framework for Islamic banking which will be ready by the time the new law is passed, Akhond Jan Rustaqi, acting deputy director general of Islamic banking at DAB, told Reuters.

"The new banking law, which includes Islamic banking, is with the parliament and DAB hopes it will be adopted by June."

Currently, Islamic banking products are offered by a handful of lenders through so-called Islamic windows, but there is no standalone Islamic lender. As of last June, Afghan banks held $4.2 billion in assets and $813 million in outstanding loans, according to the World Bank.

The central bank has stopped processing banking license applications until the new law is approved, said Rustaqi.

The new banking law and the central bank's rules will cover areas such as operating procedures, contract specifications and the operation of a centralized sharia board to determine whether products obey Islamic principles.

Banks with Islamic windows include Afghan United Bank, Ghazanfar Bank and state-owned New Kabul Bank. Afghanistan International Bank launched an Islamic window last year.

RULES

The central bank's Islamic banking rules have been developed over the past year by Afghanistan Holding Group and Malaysia's Amanie Advisors, with funding from Harakat-AICFO, a non-profit body which channels funds from foreign donors into projects that help to develop the Afghan economy.

The rules are important because several banks want clearer guidance to expand their existing windows or convert themselves into full-fledged Islamic banks, said Ahmed Bassam, managing partner at Afghanistan Holding Group, a consultancy.

"The unbanked population is very conservative, interest is considered haram (unlawful), and banks haven't been able to utilize this market."

A survey by Harakat-AICFO found 83 percent of households in five major urban centers wanted access to mortgage loans, but 93 percent of respondents preferred non-interest based financial products. Housing demand was estimated at 1.5 million dwellings in 2014 by the World Bank and DAB.

Some customers have remained cautious about using Islamic windows because of doubts over their religious permissibility, so the creation of full-fledged Islamic banks could prove crucial.

"The public had lost their confidence and trust in Islamic windows as there was no official regulatory framework in place from DAB to regulate Islamic banking," said Abdul Ali Farahi, senior project manager at Harakat-AICFO.

The new regulatory framework will eventually attract depositors and increase access to finance for the public and small businesses, he added.