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.
Andrés Cala – Madrid-based freelance journalist. Mr. Cala contributes regularly to several publications, including TIME, the New York Times and the Christian Science Monitor.
