Kabul Bank, via i corrotti

Afghanistan tries to prevent run on its biggest bank

Authorities remove two Kabul Bank executives amid allegations of corruption and mismanagement

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• Jon Boone in Kabul
• guardian.co.uk, Wednesday 1 September 2010 19.25 BST
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A security guard stands at the entrance to Kabul Bank in Kabul, Afghanistan. Photograph: S Sabawoon/EPA

Afghan authorities today attempted to prevent a potentially catastrophic run on the country's biggest bank after allegations of corruption and mismanagement led regulators to replace two of its top executives.

The revolution at the top of Kabul Bank, which is responsible for paying the salaries of nearly all the country's policemen and soldiers, has caused shock in the capital amid fears of a collapse in confidence in Afghanistan's ramshackle and corrupt financial system.

Sources in the financial industry in Kabul said that the central bank had demanded change at the top after discovering evidence that the bank's shareholders had wasted depositors' money, including on luxury villas in Dubai where they housed their families and other members of the Afghan elite.

But today Abdul Qadir Fitrat, the central bank governor, insisted that the replacement of Kabul Bank's poker-playing chairman, Sherkhan Farnood, and chief executive, Khalilullah Frozi, with a central bank official called Masood Ghazi had not been forced on the bank and that depositors should not be worried.

"Kabul Bank is one of the important banks of Afghanistan, and the central bank of the Republic of Afghanistan will never let Kabul Bank collapse," the governor told a news conference.

Fitrat said that the central bank was not taking over Kabul Bank, and that changes stemmed from a decision taken months ago to remove shareholders from positions in the bank's management. The chief executive and chairman each own 28% of the bank.

But one senior industry insider said Fitrat was simply trying to calm nerves amid fears of a run on the bank, which could easily turn violent. The dramatic change of leadership, he said, was the result of a period of infighting between the two men for control of the bank, which prompted the US embassy to demand action from the Afghan president, Hamid Karzai.

"This had nothing to do with President Karzai tackling corruption," he said. "It was because these people got caught and the US embassy had to intervene."

The banker, who has extensive knowledge of recent discussions about the future of Kabul Bank, said its only chance of survival would have to come from government bailouts.

At his press conference, Fitrat insisted the bank had enough liquid assets to cover all of its debts, but the banking source estimated that as much as $900m of Kabul Bank's total deposits of around $1.3bn had been loaned out, mostly to failing businesses linked to Kabul Bank's extraordinarily unorthodox leaders.

Farnood founded the bank after starting his financial career in the completely unregulated international hawala exchange markets, which move money through the Middle East, Africa and South Asia. He spends most of his time in his mansion in Dubai and is well known on the international poker tournament circuit.

Frozi is an eccentric character, who until recently sported dyed blond hair and is often seen wearing fur coats, and worked as a gem trader before becoming one of the country's leading tycoons.

"They regarded the bank's money as their own, but it wasn't theirs – it belonged to the depositors," the banking source said.

Much of the money is thought to have been invested in luxury Dubai property, which plunged in value after the global financial crisis.

Cash has also been spent on loss-making ventures, including Pamir Airways, the airline also run by Frozi, and in the country's major cement factories, which is run by Mahmoud Karzai, one of the president's controversial brothers who is also a minor shareholder in Kabul Bank.

The flagrant breaking of Afghanistan's banking rules was allowed to flourish under lax supervision from a weak central bank staffed by poorly trained regulators, and Kabul Bank's practice of using far more sophisticated Indian accountants to cook the books, the banking source said.

Kabul Bank's customers are generally quite small depositors attracted to the bank by its lottery prize draws for account holders and also because it provides free bank accounts to the country's army and police.

If depositors attempted to take their money out all it once it could destroy not just Kabul Bank but also the other Afghan banks that have sprung up since 2001. Initial damage to public confidence today appeared to be slight, with news of Kabul Bank's troubles spreading only slowly among the public.

via guardian.co.uk