Corruption in Afghanistan, Part DLXXII: Kabul Bank in Crisis

by Joshua Foust on 9/8/2010

A special guest post from “Sekundar.”

As has been well documented at the NYT and elsewhere, Kabul Bank went through a significant crisis last week. Kabul Bank is Afghanistan’s largest bank, and among other things is the mechanism by which the Afghan government and security forces pay their people. The crisis began when two executives were unceremoniously removed from their positions (ostensibly because under new banking regulations, executives cannot be shareholders) among allegations of malfeasance that resulted in the loss of some $300 million through bad loans and development deals, with most of that flowing into property investments in Dubai (WaPo/CP). Presiding over the shady deals were Sherkhan Farnud and Khalilullah Feruzi, the chairman and CEO, respectively. It is alleged that some of the deals involved Karzai loyalists, including the brothers of both Karzai and VP Fahim.

With the departure of the two, nervous Afghans began to withdraw money. In an astounding display of sandbagging, Feruzi let fly (from Dubai) that if the present rate of withdrawals continues, the bank will collapse, which created a panic among those who hold accounts at Kabul bank. It has been reported that customers are lining up for days to get a chance to withdraw money. Some locations have been unable to accommodate so many transactions (AP). In Kabul police and security forces have taken positions outside the bank’s offices in an effort to avoid a riot (BBC). At present it’s estimated that $300 million have been withdrawn during this crisis, with only $200 million remaining in Kabul Bank’s coffers (WaPo/WSJ/FT). The government injected $100 million just to make sure that state salaries were paid; unpaid soldiers and police are something no one wants to see. Now the government is looking to recoup the money, and maybe a villa or eighteen at Palm Jumeirah, by freezing the assets of Farnud and Feruzi (BBC/RFERL). Finance Minister Omar Zakhilwal has said that the government will not allow the bank to fail. Karzai, ever eager to dodge responsibility, has been quoted as saying “The Western press has been covering [the crisis] in a negative and provocative way,” as if there was a silver lining. The third largest stakeholder, Mahmoud Karzai, has meanwhile gone on the offensive, asserted “America should do something,” such as guaranteeing all of Kabul Banks’s clients (WaPo). At least he had the sense to make the statement in Afghanistan, and not from his luxury villa in Dubai.

As the bank’s biggest share-holders, Farnud, Feruzi, and Karzai probably don’t want the bank to fail. By speaking with the media, they have secured both the nervous attention of their Afghan customers and the Western powers that may be called upon to bail out the bank should it in-fact reach a point of failure. The US has stated that it will not assist in a bail out, at least not directly. But with the US and ISAF members providing the majority of the Afghan government’s funding, to include the governmental Da Afghanistan Bank (which, in its oversight role of banking in Afghanistan, may or may not have called for the sacking of Feruzi and Farnud), it would seem there’s little chance of the US getting off so easily. The director of Da Afghanistan Bank, Abdul Quadeer Fitrat, has said the central bank would step if necessary (NYT/Bloomberg). Additionally, the upcoming elections in both Afghanistan (Sept 18) and the US (Nov 2) make it more likely that the US government will seek a way for the stakeholders of Kabul Bank to remain calm.

In order to avoid this stability problem seemingly out of left field, the US will foot the bill for the bail out, one way or another. But the timing, just before elections, during ramazan, and after the most violent summer of the current conflict, could hardly be worse for the government in Kabul. President Obama has promised a review of the war effort in December, and will undoubtedly bring into question the favoritism the Karzai clique has enjoyed. Allegations of embezzlement will not help their case. The banking crisis won’t make or break the ISAF effort in the country, but it is one more painfully obvious example of how the central government is failing the people (CSM). The Afghan government is losing its allies, and legitimacy among its constituents. It can’t afford to do that anymore.

Sekundar works in national security, and has worked, studied, and traveled in many areas of Central and South Asia.

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This post was written by...

– author of 1848 posts on 17_PersonNotFound.

Joshua Foust is a Fellow at the American Security Project and the author of Afghanistan Journal: Selections from His research focuses primarily on Central and South Asia. Joshua is a correspondent for The Atlantic and a columnist for PBS Need to Know. Joshua appears regularly on the BBC World News, Aljazeera, and international public radio. Joshua's writing has appeared in the Columbia Journalism Review, Foreign Policy’s AfPak Channel, the New York Times, Reuters, and the Christian Science Monitor. Follow him on twitter: @joshuafoust

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