A child makes clay bricks with a mould at a brick kiln in Kandahar, Afghanistan. International aid agencies say they have only weeks to supply food and other life-saving assistance to remote provinces of Afghanistan before the winter cuts the regions off for months, as the country faces the world's worst humanitarian crisis. Photo: AFP

The United Nations on Monday pushed for urgent action to prop up Afghanistan's banks, warning that a spike in people unable to repay loans, lower deposits and a cash liquidity crunch could cause the financial system to collapse within months.

In a three-page report on Afghanistan's banking and financial system seen by Reuters, the UN Development Programme (UNDP) said the economic cost of a banking system collapse - and consequent negative social impact - "would be colossal."

An abrupt withdrawal of most foreign development support after the Taliban seized power on August 15 from Afghanistan's Western-backed government has sent the economy into freefall, putting a severe strain on the banking system which set weekly withdrawal limits to stop a run on deposits.

"Afghanistan's financial and bank payment systems are in disarray. The bank-run problem must be resolved quickly to improve Afghanistan's limited production capacity and prevent the banking system from collapsing," the UNDP report said.

Finding a way to avert a collapse is complicated by international and unilateral sanctions on Taliban leaders.

"We need to find a way to make sure that if we support the banking sector, we are not supporting Taliban," Abdallah al Dardari, head of UNDP in Afghanistan, told Reuters.

Afghanistan's banking system was already vulnerable before the Taliban came to power. But since then development aid has dried up, billions of dollars in Afghan assets have been frozen abroad, and the UN and aid groups are now struggling to get enough cash into the country.

The UNDP's proposals to save the banking system include a deposit insurance scheme, measures to ensure adequate liquidity for short- and medium-term needs, as well as credit guarantees and loan repayment delay options.

"Coordination with the International Financial Institutions, with their extensive experience of the Afghan financial system, would be critical to this process," UNDP said in its report, referring to the World Bank and International Monetary Fund.

Reuters