| Type | Private |
|---|---|
| Founded | Kabul Bank (2004) |
| Headquarters | Kabul, Afghanistan |
| Key people | Sherkhan Farnood Chairman of the Board Khalilullah Frozi Chief Executive Officer |
| Website | http://www.kabulbank.af |
Kabul Bank is a commercial bank in Afghanistan, with its main branch in the capital of Kabul. Established in 2004, it is the main bank used to pay the salaries of the army and security forces. The bank provides facilities to maintain accounts in Current, Savings Bank and Fixed Deposits; and offers its consumers branch and ATM services. The bank is under the supervision of Da Afghanistan Bank (DAB), which is the central bank of Afghanistan.
The bank was involved in a major financial scandal in 2010, when its Chairman Sherkhan Farnood and other insiders were spending the bank's $1 billion for their own personal lavish style living as well as lending money under the table to family, relatives and friends. In September 2010, one of the principal owners of the bank, said that depositors had withdrawn $180 million in two days and predicted a "revolution" in the country's financial system unless the Afghan government and the United States moved quickly to help stabilize the bank.[1][2] In November 2010, reports appeared that Farnood and chief executive Khalilullah Frozi both had been sacked from duties;[3] as of early 2011 both were effectively under house arrest and could not leave the country,[4] and in July 2011 both were formally arrested and detained in Kabul.[5] DAB stated in February 2011, it would seek to sell Kabul Bank within three years once it was rehabilitated,[6] but both the International Monetary Fund and US officials subsequently pressed for a rapid winddown of the institution.[7] A recent USAID inspector general report estimated that fraudulent loans diverted $850 million to bank insiders.[5] As of October 2011, more than a year after the government seized control, officials have recovered less than 10 percent of the nearly $1 billion that went missing.[8]
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Since 2004, Kabul Bank has increased its branch network to 143 branches covering 19 provinces. The bank has 44 branches in Kabul, with the remaining 99 branches located in 18 other provinces.
Accounts can be opened and maintained in Afghani, USD and EUR. Kabul Bank is connected throughout the globe with SWIFT facility, which enables fund transfer for its customers. The bank has correspondent relationship with seven international banks situated in Germany, China, Iran, Tajikistan, Saudi Arabia and India. It is also the principal agent for Western Union in Afghanistan, and is handling 85% of their total remittances business.
Kabul Bank is significant to Afghanistan's internal security and stability because it is the vehicle used to pay as many as 300,000 Afghan government employees, mostly military and police, who are key to plans to rebuild Afghanistan's capacity to deal with its ongoing Taliban-led insurgency:[3]
In early 2010, the Washington Post reported that the Kabul Bank, with its ties to the Karzai family and questionable practices, played a part in "a crony capitalism that enriches politically connected insiders and dismays the Afghan populace."[11]
At the beginning of September, Frozi, one of the two largest shareholders of Kabul Bank, said reports indicating that the institution had lost as much as $300 million were overstated. But he predicted that if Afghan depositors continued to withdraw their money at the current rate, Kabul Bank would almost certainly collapse, undermining confidence in the nascent financial system the Afghans have been trying to build with American help.
"If this goes on, we won’t survive", Mr. Frozi said in an interview. "If people lose trust in the banks, there will be a revolution in the financial system."
Mahmood Karzai is the brother of the Afghan President Hamid Karzai and a seven percent shareholder in the bank. In a telephone interview with the Boston Globe he said: "America should do something." [12] In October, the Washington Post reported that Mahmood Karzai could soon be indicted for tax evasion in the US, though he denied the charges, telling the newspaper: "I'm very clean", and insisting his only interest was "rebuilding Afghanistan."[2]
Afghan leaders promised to guarantee deposits in an attempt to arrest the panic, which began at the end of August when the country's top banking officials demanded the resignations of both Frozi and Farnood.[1] "The government has decided that there will be an audit firm that will be coming to audit not only Kabul Bank accounts but also other private banks in Afghanistan", an Afghan presidential spokesman announced in late October. Earlier in the month, the government also froze assets held by some of Kabul Bank's owners even as the central bank governor said it was solvent and had the backing of Karzai's US-funded administration.[2] US-educated economist Hamidullah Farooqi, a former Karzai minister and Chairman of the Afghanistan International Chamber of Commerce, said Afghanistan received a "massive wake-up call" from the crisis, further stating: "It's not just a lack of capacity in our institutions, there is a lack of laws and a lack of accountability, which is much more serious. It's a case of the blind leading the blind. They are too young, they are babies."[3]
In mid-January 2011, acting chief financial officer Rana Tayyab Tahir and other Pakistani employees of Kabul Bank fled to Pakistan, apparently out of fear for their lives and possible arrest, though some said they were being made scapegoats for powerful shareholders. Afghan authorities also called in several bank managers, including foreigners, for questioning and detained some in southern Afghanistan's Helmand Province in connection with illicit transfers of bank funds.[4]
In early February 2011, DAB Governor Abdul Qadir Fitrat said the central bank would impose stricter rules on banks wanting to handle about $1.5 billion worth of salaries for government and security officials, which until now has been done by Kabul Bank. Fitrat also told Reuters the total amount of money at risk over suspected irregularities at Kabul Bank amounted to $579 million, almost twice the figure estimated when the bank's troubles first surfaced. Fitrat brushed off concerns that it faced liquidation, saying it would be privately owned again within three years. "Kabulbank is stabilised, it has enough cash at its disposal and the central bank is trying to rehabilitate the bank and then at some point sell it to potential buyers in two or three years," Fitrat told Reuters.[6] In early July 2011, Fitrat resigned as head of the central bank after fleeing to the United States, claiming his life had been threatened and that he was being made a scapegoat for politically connected individuals.[5]
After a mid-February 2011 visit by Neal Wolin, the US deputy Treasury secretary, the Afghan finance ministry said that weak international support had exacerbated the crisis. “Afghan and US officials agreed that (the crisis) ... was compounded by the erroneous audit by PricewaterhouseCoopers, and ineffective international technical assistance and supervision,” the ministry said. However, Wolin pressed the government to rapidly place the lender into receivership, echoing calls made by a previous International Monetary Fund (IMF) delegation. “The deputy secretary ... stressed the need for the Afghan government to take swift and decisive action to ensure a credible, effective resolution of issues related to Kabul Bank," the US embassy said in statement.[7] Kabul Bank was put into receivership following the scandal and a new bank set up, but only $70 million of fraudulent loans it granted have so far been recovered, with criminal investigations ongoing. In October 2011, Afghanistan's parliament approved a $51 million payment to DAB as part of a planned compensation package over its multi-million-dollar bailout; the payment is part of a package of government measures agreed with the IMF to secure a new loan. Afghanistan has been without an IMF program since the Kabul Bank failure, but the IMF announced that it is moving ahead on a new $129 million loan in the wake of the government's reform promises, with a new program expected to be submitted to the IMF executive board for approval in November 2011.[13]
At the end of June 2011, the Washington Post reported that Farnood and Frozi used fake names, forged documents, fictitious companies and secret records as part of an elaborate ruse to funnel hundreds of millions of dollars to shareholders and top Afghan officials, including President Karzai's brother Mahmood and Mohammed Fahim, the country's first vice president. Both Farnood and Frozi were arrested in Kabul and held without charge, even though Afghanistan's attorney general said the evidence against them was "quite clear." Without a successful resolution of Kabul Bank’s problems, one senior U.S. official said Afghanistan could face "the collapse of the banking sector."[14] As of October 2011, neither man had yet been charged with a crime, but Deputy Attorney General Enayatullah Nazari said the government intends to bring them to court. “A crime has happened,” Nazari said. “They will go to the court whether they manage to secure the money or not.” Authorities loosened the terms of their detention and provided them with a security detail to go to a bank office on workdays and on occasion to fancy restaurants and hotels for what Nazari described as work meetings.[8]