By David Nakamuraand Andrew Higgins
Washington Post Staff Writers
Thursday, September 2, 2010; 8:03 AM
KABUL - With Afghans clamoring to pull their cash from their nation's biggest bank, the United States risks a politically perilous decision: whether to step in to help shore up a wobbly bank critical not only to Afghanistan's economy but also to the battle against the Taliban.
A swarm of customers at the headquarters of Kabul Bank in the Afghan capital on Wednesday raised the prospect of a full-scale bank run that would further alienate dispirited Afghans from their government and imperil American efforts to contain the insurgency.
On Thursday morning, scores of Afghans again flooded the Kabul Bank offices to withdraw their savings. The scene was crowded but orderly. At one branch, where government employees were trying to cash their paychecks, the bank staff declared a limit of $1,000 per customer.
Later in the day, the Ministry of Finance issued a statement declaring that all government employees would be able to cash their checks from Kabul Bank, which the ministry called "a reliable bank."
Still the uncertainty was taking its toll. One source with knowledge of Kabul Bank's books said depositors had withdrawn $90 million on Wednesday and far more than that Thursday. Afghan President Hamid Karzai had scheduled a news conference for 5 p.m. Thursday at the presidential palace, though the subject of the conference was not disclosed by aides.
Haji Rafi, head of rival Afghan United Bank, said his bank had prepared for a potential run on its own assets by account holders but added that there was not much change in activity Thursday. Asked if he was concerned that a potential collapse of Kabul Bank would harm Afghanistan's nascent banking industry, Rafi said: "I'm not worried because the Central Bank already assured us they are behind the bank."
The tumult in Kabul suggested that a decision by the Central Bank to purge the management of Kabul Bank and rein in its freewheeling ways - which included disastrous property speculation in Dubai - could backfire and set off the very crisis officials hoped to avoid. Karzai's brother Mahmoud, who used to run an Afghan restaurant in Maryland, owns 7 percent of Kabul Bank.
Afghan officials, struggling to prevent panic, insisted Wednesday that Kabul Bank and its rivals, some of which are perhaps even more fragile, are not in danger of collapse.
David Cohen, the Treasury Department's assistant secretary for terrorist financing, praised the Central Bank's leaders for acting "aggressively, decisively and as a bank regulator should act under the circumstances." He said the Treasury Department is "confident" that the Central Bank "has the expertise to handle the situation with Kabul Bank."
Treasury has assigned a small team of experts to work with the Central Bank on the matter.
A senior U.S. official, who spoke on the condition of anonymity because of the sensitivity of the issue, played down the wider consequences that could result should Afghanistan's banking sector implode, noting that only about 5 percent of Afghans have bank accounts. But Kabul Bank, which has taken in $1.3 billion in deposits, plays a pivotal political as well as economic role: It handles salary payments for soldiers, police officers and teachers.
"The teachers will come with their books, but the soldiers have Kalashnikovs," warned a prominent Afghan businessman who spoke on the condition of anonymity.
An unchecked run on Kabul Bank, which could spread alarm to other banks, would jeopardize not only depositors' savings but President Obama's Afghan strategy, which is built around efforts to rally the public against the Taliban. But any move by the U.S. government to help shore up Afghan banks probably would stir fierce opposition in the United States, where the use of taxpayers' money to bail out Wall Street after the 2008 financial crisis still rankles many.
Most members of the crowd at Kabul Bank on Wednesday appeared to be businessmen, some with international operations. They wanted to withdraw large sums to pay employees and protect their assets.
Shareholders said Kabul Bank has $500 million in liquid assets, a substantial cushion. But one major shareholder familiar with the matter reported problems accessing this cash, much of which is stashed with the Central Bank.
The U.S. government has spent millions of dollars on contractors, Treasury Department advisers and computers for Afghanistan's Central Bank in an effort to fortify feeble supervision of a financial sector rooted in the fast-and-loose practices of the "hawala" money exchanges. Sherkhan Farnood, Kabul Bank's founder and ousted chairman, got his start by running a successful but corner-cutting hawala network, with branches in Russia, Dubai, Afghanistan and elsewhere.
Speaking Wednesday from his villa in Dubai, which was paid for by Kabul Bank, Mahmoud Karzai, the president's brother, said cash withdrawals from the bank were a "little bit more than usual" but did not threaten to cause a meltdown. A full-scale run on Kabul Bank, he added, "would be a major disaster."
A big concern is that Kabul Bank, which has issued large and sometimes hidden loans to its own shareholders and well-connected insiders, won't get its money back. The bank also has spent about $160 million on villas at the Palm Jumeirah island resort and other real estate in Dubai, where prices have since collapsed. Nearly all these properties are registered in the names of Farnood and his wife, not the bank's. Farnood has said he will hand over the titles.
Central Bank Governor Abdul Qadir Fitrat called a news conference Wednesday as rumors spread across the capital and beyond. "The bank is solvent," he said while flanked by Farnood, a boisterous world-class poker player, and Masood Ghazi, Kabul Bank's new acting chief executive. Until he took the Kabul Bank post, Ghazi worked as a senior official at the Central Bank.
"Kabul Bank is one of the most important banks of Afghanistan, and the Central Bank and the Afghan government will by no means let Kabul Bank be affected," Fitrat said.
Shortly after noon Wednesday, Zabi Pacha, 27, who owns a construction company that does business with the U.S. military, said he had been waiting more than four hours to withdraw the $100,000 in his account. When he arrived, he found a line outside the bank. Pacha said he was given a number and told to wait. An armored car arrived about 9:30 a.m., he said. But as the minutes ticked by, he grew nervous that the branch might be out of cash.
"I will transfer to another bank and another account somewhere else," Pacha said. "I'm scared. That's a big amount of money. I cannot keep my money here."
Hasib, 26, a civil engineer, was also waiting to transfer his money and close his account. He had rushed to the bank after a friend called to tell him about the media reports of the Central Bank's intervention, which was first reported by The Washington Post.
Hasib did not know many details, but said: "I'm nervous and I hope to get my money soon. It's a big concern for us. Nobody is telling the truth here. We only heard that the bank is corrupted. We don't need to go deeper in detail about what happened. I'm concerned about my money."
Fitrat, the Central Bank governor, said the ouster of Kabul Bank's top officials was a routine affair aimed at bringing the bank in line with new regulations, which bar shareholders from taking any management role. He said this was not a government "takeover" but an effort to professionalize the bank.
Shareholders described a more dramatic sequence of events. The Central Bank's intervention followed weeks of acrimonious feuding between senior Kabul Bank executives for control of the bank, along with revelations of off-the-book loans, often to shareholders, including the brother of Vice President Mohammed Fahim. Such loans were cut into small packets to skirt legal lending limits.
The Central Bank stepped in Monday on orders from President Karzai. Karzai had previously hesitated to take robust action against Kabul Bank, which supported his fraud-tainted reelection campaign last year. People familiar with the matter said the president had repeatedly urged Mahmoud, his brother, to disentangle himself from the bank.
Mahmoud declined, saying he wanted to help build a modern financial sector.
One senior Afghan official, who spoke on the condition of anonymity, said that he had hoped for the best but that "the worst is happening."
Higgins reported from Dubai. Correspondent Joshua Partlow in Dubai and special correspondent Masood Azraq in Kabul contributed to this report.