Kabul Bank: How Afghanistan’s future was jeopardized
Unfortunately, there is no limit to the number of careless Afghan leaders who are willing to gamble with the fate of their country for personal gain.
The recent acquisition of Kabul Bank to prevent the total collapse of the country’s financial system is just the latest proof that this government, corrupt to the core, is a greater threat to Afghan stability than the Taliban, the opium trade and the West’s failed war. together. Perhaps it should come as no surprise, then, that less than a third of Afghans voted in the recent parliamentary elections.
Worse, there are no signs of regret or real willingness to change a course that could easily lead not just to a failed bank, but to a failed state, civil war, and bloodshed. And, from many Afghan authorities, it’s more of the same: denial.
The Kabul Bank story begins in 2004 with the cautious optimism of a country at war. Back then, this Islamic financial institution had the formidable task of becoming the backbone of a non-existent economy. That is, give Afghans a safe place to save their money, encourage an entrepreneurial middle class and help finance the long road to stability, while undermining Taliban control over the country’s economy.
On the surface, the privately owned Kabul Bank appeared to be doing just that. As of the end of 2009, it was the largest private bank in Afghanistan in terms of turnover, branches, customers, and employees, with assets of just over $1 billion and liabilities of $991 million. It had matching agreements with banks in eight countries, including Saudi Arabia, controlled about 40 percent of the country’s financial system and, until recently, had about $1.3 billion in deposits.
The bank has close ties to the government, not unlike other countries. Until last month, the two largest shareholders were Chairman Sher Khan Farnood and Chief Executive Officer Khalilullah Fruzi, each with a 28 percent stake. President Hamid Karzai’s brother, Mahmoud Karzai, is the third largest shareholder, with a 7 percent stake, and Afghan tycoon and brother of First Vice President Mohammad Qasim Fahim, Mohammad Fahim, is also among the largest shareholders.
The bank became vital to Afghanistan’s stability, managing the government payroll of some 300,000 Western-funded soldiers, police and state employees, as well as being the country’s top private lender and custodian of Afghan savings.
More importantly, however, it introduced credibility and trust into a virtually non-existent financial system, perhaps one of the few success stories Afghans could point to. Hundreds of Afghans and investors, who for generations have mistrusted the country’s institutions, including those of the current government, relied on the Kabul Bank as one of the few agencies that would not fade into broken promises, politics and war like other powerful domestic and foreign . . However, today this is no longer the case.
The scandal broke when Farnood and Fruzi were said to have resigned in early September and, as with many Afghanistan problems, it was soon followed by a government cover-up. Afghan officials went to great lengths to deny they had anything to do with improper lending or a $300 million loss the bank had recorded, blaming any wrongdoing on a new banking regulation imposed in June that barred major shareholders from holding positions. executives.
But news published in the Western media soon revealed what appears to be a massive fraud. Farnood and Fruzi had invested millions of the bank’s money in the speculative property market in the United Arab Emirates. Its assets, along with those of most major shareholders and carriers, were frozen. The Central Bank of Afghanistan also demanded that the two executives hand over 16 properties and two pieces of land in Dubai worth $160 million.
Further digging revealed that Afghan elites had borrowed from the Kabul Bank to build their empire. Farnood, one of the richest men in the country, would have received a loan of almost 100 million dollars that he has not repaid.
The media investigation then exposed rotten deals involving President Karzai’s brother, Mahmoud. After all, it was Karzai and Farnood who recommended Fahim as the president’s running mate. After the selection, Kabul Bank suspiciously became one of the campaign’s biggest donors, and Karzai won what is now seen as a grossly rigged election.
It also turns out that Mahmoud Karzai’s $500 million stake in Kabul Bank was bought out with a loan from the bank itself, a particularly disturbing move. Karzai also bought a luxury villa in Dubai with a bank loan that he then sold less than a year later for a profit of $800,000. He repaid his loan for the property.
Other off-the-book loans were later discovered, while an audit revealed that the two top executives had awarded each other $500,000 bonuses in 2009 for their brilliant management. The same audit further unmasked that Farnood’s wife, Farida Farnood, owns a 6.68 percent stake in the bank, and Fahim’s son, Zahib Fahim, another 2.96 percent.
But even before many of these transactions were disclosed, Afghan police had to beat hundreds of depositors who flocked to the bank to withdraw their money with batons. At least $300,000 was withdrawn in a matter of days. But even then, the government defended Kabul Bank by claiming that millions were deposited simultaneously, no doubt by Western governments that needed to pay government salaries.
The governor of the Central Bank insisted that all was well and denied that a takeover was imminent. Of course, he wasn’t. On September 13, the Central Bank moved to take over Kabul Bank “for the foreseeable future”, in what amounted to a government takeover. Even then, however, the government accused the Western media of fabricating a scandal.
Regardless of the cover-up orchestrated by Afghan officials, the undeniable fact is that the owners of Kabul Bank ran the institution like a personal piggy bank with the complicity of the government and the country’s elite. It is impossible to say how much President Karzai knew. But the government’s reaction – or, perhaps, the lack thereof – is proof enough to the Afghan population, if not to the courts, that even Afghanistan’s largest financial institution cannot be trusted.
And this is where the loop closes. The owners of Kabul Bank gambled with the future of the country, in Farnood’s case, literally. In 2008, he tried but failed to win the World Series of Poker. It is the second most corrupt country in the world, second only to Somalia, to the tune of $2.5 billion annually, or 25 percent of Afghanistan’s gross domestic product.
It is not the future of the Afghan Bank that the Central Bank should be concerned about. Until a few weeks ago, only 5 percent of Afghans had bank accounts. The challenge is to rebuild trust in the nascent Afghan financial system, among both nationals and foreigners. Failure to do so could undermine the country’s economy at a critical time, either scaring away foreign investors or forever disappointing small farmers who still cling to hopes of a brighter Afghan future.
The government’s response so far has been an even bigger disappointment than the scandal itself. At this point, the only other option for the Afghans is the Taliban.
First published on Monday, October 18, 2010