Sadly, there are no limits to how much careless Afghan leaders
are willing to gamble with their country's fate for personal gain.
The
recent takeover of Kabul Bank to avert total meltdown of the country's
financial system is just the latest proof that this government, corrupt
to the very core, is a bigger threat to Afghan stability than the
Taliban, the opium trade, and the West's failing war put together.
Perhaps it should come as no surprise, then, that less than a third of
Afghans cast a vote in the recent parliamentary elections.
Worse
yet, there are no signs of contrition or real willingness to change a
course that could easily lead to not only 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 story of Kabul Bank begins in 2004
with the cautious optimism of a country at war. Back then this Islamic
financial entity had the formidable task of becoming the backbone of a
non-existent economy. That is, to give Afghans a safe place to save
their money, to encourage an entrepreneurial middle class, and to help
finance the long road toward stability, while undermining the Taliban's
hold on the country's economy.
On the surface, privately owned
Kabul Bank seemed to be doing just that. At the end of 2009, it was
Afghanistan's largest private bank in terms of business volume,
branches, customers and employees, with assets of slightly more than $1
billion and liabilities of $991 million. It had correspondent agreements
with banks in eight countries, including Saudi Arabia, controlled about
40 percent of the country's financial system and, until recently, held
around $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
officer Khalilullah Fruzi, who each had a 28 percent share. The brother
of President Hamid Karzai, Mahmoud Karzai, is the third largest
shareholder, with a 7 percent stake, and Afghan mogul and brother of
First Vice President Mohammad Qasim Fahim, Mohammad Fahim, is also among
the biggest stakeholders.
The bank made itself vital to
Afghanistan's stability, handling the government's payroll of some
300,000 soldiers, police and state employees funded by Western
countries, in addition to being the country's top private lender and
safe keeper of Afghans' savings.
More importantly though, it
introduced credibility and confidence in 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, depended on Kabul Bank as one of the few bodies that would
not wither away into unfulfilled promises, politics and war like other
foreign and national powerbrokers. However, today this is no longer the
case.
The scandal broke when Farnood and Fruzi were said to have
resigned early in September and, as with many of Afghanistan's troubles,
was soon followed by a government cover-up. Afghan officials went to
great lengths to deny they had anything to do with improper loans or a
$300 million loss the bank had posted, and chalked any irregularities up
to a new bank regulation imposed in June that barred major shareholders
from holding executive positions.
But news published in Western
media soon revealed what appears to be massive fraud. Farnood and Fruzi
had invested millions of the bank's money in the speculative real estate
market in the United Arab Emirates. Their assets, along with those of
most other major shareholders and barrowers, were frozen. The Central
Bank of Afghanistan also demanded that the two executives surrender $160
million worth in 16 Dubai properties and two plots.
Further
digging revealed that Afghan elites had borrowed from Kabul Bank to
build their empire. Farnood, one of the country's richest men, has
reportedly been loaned almost $100 million, which he hasn't repaid.
Media
investigation then exposed rotten businesses involving President
Karzai's brother Mahmoud. It was Karzai and Farnood after all who
recommended Fahim as running mate for the president. After the
selection, Kabul Bank suspiciously became one of the campaign's biggest
donors, and Karzai went on to win what is now widely considered a
grossly fraudulent election.
It also turns out that Mahmoud
Karzai's $500 million stake in Kabul Bank was bought with a loan given
to him by the bank itself, a particularly disturbing operation. Karzai
also bought a luxury villa in Dubai with a bank loan that he then resold
less than a year later for an $800,000 profit. He repaid his loan for
the property.
Other off the book loans were discovered later,
while an audit revealed that the two top executives had awarded
themselves $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
revealed, Afghan police had to beat with batons hundreds of depositors
who flocked to the bank to withdraw their money. At least $300,000 was
withdrawn within days. But even then the government defended Kabul Bank
under claims that millions were simultaneously deposited, no doubt by
Western governments that needed to pay for government wages.
The
Central Bank governor insisted that all was well and denied that a
takeover was imminent. Of course, it wasn't. On 13 September, the
Central Bank moved to seize Kabul Bank "for the foreseeable future," in
what amounted to a government takeover. Even then, however, the
government accused Western media of fabricating a scandal.
Regardless
of the cover-up being orchestrated by Afghan officials, the undeniable
fact is that the owners of Kabul Bank ran the institution as a personal
piggybank with the complicity of the country's government and elite. How
much President Karzai knew is impossible to say. But the government's
reaction-or, perhaps, the lack thereof-is sufficient proof for the
Afghan population, if not for tribunals, that they can't even trust
Afghanistan's most important financial institution.
And this is
where the loop closes. The owners of Kabul Bank gambled with the
country's future-in the case of Farnood, literally. In 2008, he tried
but failed to be crowned in the World Series of Poker. It is the second
most corrupt country in the world, only surpassed by Somalia, at a tune
of $2.5 billion annually, or 25 percent of Afghanistan's gross domestic
product.
It's not the future of the Afghan Bank that the Central
Bank should be worrying 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, both among nationals and foreigners.
Not doing so could undermine the country's economy at a critical
juncture, whether by scaring away foreign investors or by forever
disappointing small farmers still clinging to hopes of a brighter Afghan
future.
The government's response so far has been an even greater
letdown than the scandal itself. At this point, the only other choice
for Afghans is the Taliban.
First published Monday 18 October 2010
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