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Karzai urges Afghans not to panic as bank withdrawals accelerate

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.

Farnood, a world-class poker player who founded Kabul Bank, blamed the panic on the Central Bank's decision to remove him as chairman. "I've never cheated anyone and have always paid everyone. People trust me," said Farnood, referring to his years running a successful hawala money exchange in Russia and Afghanistan.

He said he was flying back to Kabul on Friday for a meeting with President Karzai. Rumors spread in Kabul on Thursday that Farnood had been barred from leaving Afghanistan. "Not true. I'm here," he said soon after his arrival in Dubai.

At the start of the week, Kabul Bank had deposits of $1.31 billion. By the close of business Thursday, those had slipped to $1.11 billion. But most of this money is not immediately available to pay depositors, as it has been given out in loans. Several of the bank's biggest borrowers are its own shareholders, most notably the brother of Afghanistan's vice president, Mohammed Fahim, who is hospitalized in Germany for heart surgery.

Alarmed by the spreading panic, the Afghan government moved forcefully Thursday to try to calm the public. Kabul Bank's main branch in the capital stayed open four hours later than usual to handle payments. Crowds also gathered outside the bank's branches in Mazar-e Sharif in the north, Kandahar in the south and Badakhshan in the northeast.

At his news conference, President Karzai assured hundreds of thousands of government employees who get their salaries through Kabul Bank that "we have enough cash to support the bank. We have $4.8 billion in cash. Even if the whole banking system collapsed, we'd still have enough money to support it."

Earlier, Finance Minister Omar Zakhilwal played down concerns about the bank's future, blaming foreign news media for stirring alarm. "Kabul Bank will never collapse," Zakhilwal said. "It will remain strong. The government will support Kabul Bank."

The finance minister acknowledged that fearful customers have flocked to Kabul Bank branches to demand their money but insisted that "it's not a crisis."

Nonetheless, Shafiq Javed, 38, said he decided to withdraw $900 of the $2,000 he had in savings. "We used to trust them," he said, referring to bank managers. "Since this revelation, everybody is concerned."

At a nearby branch where many government workers cash their paychecks, tellers were giving out no more than $1,000 per customer.

The Central Bank has presented its decision to oust Farnood and former chief executive Khalilullah Fruzi as a routine affair aimed at bringing Kabul Bank into line with new regulations that bar shareholders from management.

But bank insiders give a more dramatic account of events. The Central Bank's move on Kabul Bank followed weeks of volatile feuding between Farnood and Fruzi, as well as mounting concern over large and probably illegal loans to the bank's shareholders and other well-connected insiders.

U.S. officials are hoping that because only up to 5 percent of Afghans hold bank accounts and most of the economy revolves around cash, the fallout from the Kabul Bank crisis can be contained. Afghan businessmen and others, however, said that should Kabul Bank fall, the consequences would be catastrophic for both the economy and security of Afghanistan.

Londoño and Nakamura reported from Kabul. Staff writer Brady Dennis in Washington contributed to this report.

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