Afghan authorities take over biggest bank to avoid meltdown

By Joshua Partlow and Andrew Higgins
Washington Post Staff Writers
Tuesday, August 31, 2010; 10:43 PM

KABUL - Afghanistan's Central Bank has taken control of the country's biggest and most politically potent private bank and ordered its chairman to hand over $160 million worth of luxury villas and other real estate purchased in Dubai for well-connected insiders, according to Afghan bankers and officials.

The intervention aims to shore up a key pillar of the Afghan economy and also of the battle against the Taliban - both of which have been marred by rampant corruption.

Kabul Bank handles salary payments for Afghan soldiers, police and teachers, and has taken $1.3 billion in deposits from ordinary Afghans. It has said it has $500 million in liquid cash.

Kabul Bank's wayward lending practices, real estate speculation in Dubai and weeks of venomous feuding between major shareholders have threatened to wreak economic and political havoc.

U.S. officials have long worried that Kabul Bank, because of its size and unorthodox practices, could trigger financial mayhem, a prospect that would leave Afghan security forces without pay, threaten unrest by angry - and often armed - depositors and undermine President Obama's Afghan strategy.

Shareholders insisted in interviews that Kabul Bank is solvent. The extent of its bad loans, many of them to the families and friends of powerful politicians, is unclear.

Some Afghan businessmen said they consider President Hamid Karzai's decision to confront Kabul Bank his first significant move in the fight against corruption in Afghanistan. U.S. officials have often prodded Karzai to crack down on graft in his government and have complained that the Afghan leader has not taken a firm enough stand, and has even intervened to protect suspects who are close to him.

Kabul Bank's chairman, Sherkhan Farnood, a world-class poker player, and its chief executive, a former gem trader, were forced to resign Monday after being threatened with arrest if they did not accept a management purge ordered by Karzai, said people familiar with the showdown.

The bank - which is partly owned by Karzai's brother Mahmoud - has been placed in the hands of the Central Bank's chief financial officer, who was installed as chief executive. He will dig into the bank's accounts in search of illegal, off-the-book loans totaling perhaps hundreds of millions of dollars and try to recover assets.

Karzai chose to move on Kabul Bank after he received evidence of the bank's illicit dealings from Abdul Qadir Fitrat, the Central Bank governor, at a meeting about a month ago. Gen. David H. Petraeus, the top U.S. commander in Afghanistan, attended the meeting, according to Kabul Bank insiders, who spoke on the condition of anonymity and said that Petraeus urged Karzai to take action.

Two bank shareholders said Farnood had helped force the hand of Afghan authorities by providing the U.S. Embassy in Kabul with details of irregular lending. This information, they added, prompted Petraeus to press Karzai to clean house. Farnood denied this.

Karzai initially hesitated to act and, people close to the matter said, ordered a full-scale purge only on Sunday, after a stormy and inconclusive meeting between bank managers and the Central Bank that day.

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