Karzai urges Afghans not to panic as bank withdrawals accelerate

Despite media reports of corruption at Kabul Bank, Afghan officials insist that it is not in danger of collapse.
By Andrew Higgins, David Nakamura and Ernesto Londoño
Washington Post Staff Writers
Saturday, September 4, 2010; 3:11 AM

DUBAI, UNITED ARAB EMIRATES - As depositors thronged branches of Afghanistan's biggest bank, President Hamid Karzai told Afghans on Thursday not to panic shortly after his brother, a major shareholder in the beleaguered Kabul Bank, called for intervention by the United States to head off a financial meltdown.

"Kabul Bank is safe," Karzai said at a joint news conference at the presidential palace in Kabul with Defense Secretary Robert M. Gates. "People need not panic, need not be worried."

Earlier in the day, Mahmoud Karzai voiced concern over Kabul Bank's ability to withstand an onslaught of depositors demanding their money back. "America should do something," he said in a telephone interview. He suggested that the Treasury Department guarantee the funds of Kabul Bank's clients, who number about 1 million and have more than $1 billion on deposit with the bank.

The rush to withdraw funds from Kabul Bank, which handles salary payments for soldiers, police and teachers, began Wednesday, a day after news that Afghanistan's Central Bank had removed the bank's top two executives and installed a Central Bank official as chief executive.

Depositors withdrew $85 million Wednesday and $109 million Thursday, leaving Kabul Bank with about $300 million in liquid cash, said the bank's ousted chairman, Sherkhan Farnood.

Speaking in his first interview since his ouster Monday, Farnood, who remains a substantial shareholder, said he hoped the bank could weather the storm without U.S. help. "If we survive Saturday and Sunday, we will be okay," said Farnood, who spoke at his luxury waterfront villa in Dubai shortly after his return to the Persian Gulf emirate from Kabul. Friday is a holiday, and all Afghan banks are closed.

"If Kabul Bank collapses," he added, "it will be a disaster."

Farnood has pledged to hand over to Kabul Bank the titles of real estate purchased with bank money but registered until now in his name and that of his wife. The property, he said, is worth about $160 million.

The Treasury Department has sent a team of experts to help the Afghan Central Bank handle the crisis, but it has so far ruled out any injection of U.S. money to revive Kabul Bank. "While we are providing technical assistance to the Afghan government, we are taking no steps to recapitalize Kabul Bank," said an administration official who spoke on the condition of anonymity.

But Mahmoud Karzai, who owns 7 percent of Kabul Bank, warned that while the bank "is stable and has money," it might take U.S. intervention to beat back panic. "If the Treasury Department will guarantee that everyone will get their money, maybe that will work," said the president's brother, who rushed to Kabul on Wednesday from Dubai, where he spends most of his time in a Palm Jumeirah villa purchased with Kabul Bank money.

Kabul Bank has scores of branches across Afghanistan and holds the accounts of key Afghan government agencies. It was also a big contributor to President Karzai's fraud-tainted election campaign last year.

The collapse of the bank would probably spread panic throughout the country's fledgling financial sector and wipe out nine years of effort by the United States to establish a sound Afghan banking system, seen as essential to the establishment of a functioning economy. This would give a big boost to a mostly unregulated "hawala" system, a network of informal money exchanges that, in addition to serving ordinary customers, also provides a secure and opaque channel through which drug traffickers and terrorists are believed to move their funds.

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