Bank of Kabul: how the future of Afghanistan was put in jeopardy
Unfortunately, there is no limit to the number of careless Afghan leaders who are willing to play with the fate of their country for personal gain.
The recent acquisition of Kabul Bank to prevent the complete collapse of the country’s financial system is just the latest proof that this corrupt government to the core is a greater threat to Afghan stability than the Taliban, the opium trade and the failed war of the West. together. Perhaps it should come as no surprise, then, that less than a third of Afghans voted in recent parliamentary elections.
Worse yet, there are no signs of regret or real willingness to change a course that could easily lead not only to a bank failure, but to a failed state, civil war and bloodshed. And, from many Afghan authorities, it is more of the same: denial.
Kabul Bank’s 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 the Taliban’s grip on the country’s economy.
On the surface, the privately owned Kabul Bank seemed to be doing just that. At 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 US$1 billion and liabilities of US$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, held about $1.3 billion in deposits.
The bank has close ties to the government, not unlike other countries. Until last month, the two biggest shareholders were chairman Sher Khan Farnood and chief executive 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 leading private lender and the guardian of Afghans’ 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 distrusted the country’s institutions, including those of the current government, depended on Kabul Bank as one of the few bodies that would not wither in broken promises, politics and war like other national power brokers. and foreigners. . However, today this is no longer the case.
The scandal erupted when Farnood and Fruzi were said to have resigned in early September and, as with many of Afghanistan’s problems, 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, and blamed 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 real estate 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 plots of land in Dubai worth 160 million dollars.
Further excavations 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 a running mate for the president. After the selection, Kabul Bank suspiciously became one of the campaign’s biggest donors, and Karzai won what is now considered a grossly rigged election.
It also turns out that Mahmoud Karzai’s $500 million stake in Kabul Bank was purchased with a loan from the bank itself, a particularly disturbing deal. Karzai also bought a luxury villa in Dubai with a bank loan that he later sold less than a year later for a profit of $800,000. He paid off his loan on the property.
Other off-the-books loans were later discovered, while an audit revealed that the two top executives had given each other $500,000 bonuses in 2009 for 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 revealed, Afghan police had to club hundreds of depositors who flocked to the bank to withdraw their money. At least $300,000 was withdrawn in a matter of days. But even then, the government defended Kabul Bank on the grounds that millions were simultaneously deposited, no doubt by Western governments who needed to pay government salaries.
The central bank governor 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 seize the Bank of Kabul “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 as 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 of it – is proof enough to the Afghan population, if not to the courts, that they cannot even trust Afghanistan’s most important financial institution.
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 should concern the Central Bank. 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, both among nationals and foreigners. Failing to do so could undermine the country’s economy at a critical time, either by scaring off foreign investors or forever disappointing small farmers still clinging 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 Afghans is the Taliban.
First published on Monday, October 18, 2010