By David Nakamura and Ernesto Londoño
Washington Post Foreign Service
Wednesday, September 8, 2010; 10:49 PM
KABUL - Kabul Bank became the pride of Afghanistan's financial system by offering the conveniences and thrills of 21st-century capitalism: branches in far-flung provinces, plentiful ATMs, and lottery prizes of cash and houses.
But the scene outside the bank's headquarters Wednesday was far from that modern ideal: Police used batons to beat back hundreds of government employees desperate to cash their paychecks amid fears that Kabul Bank will go bankrupt because of alleged corruption among its top executives.
This rapid turnabout in Kabul Bank's fortunes has led Afghans to question whether Western-style free-market capitalism is just another broken U.S. promise, along with secure neighborhoods, transparent elections and ambitious development. Many here blame the United States, saying it did not provide strong oversight and alleging American complicity in last week's financial meltdown.
"The problem with the U.S. is they always implement the modern formula in Afghanistan, and that's not possible in a country like this," said Siddiq Ahmad Usmani, chairman of the Afghan parliament's Budget and Finance Committee. "They're responsible for whatever crisis will come to our country."
Depositors have mobbed Kabul Bank over the past week, withdrawing $300 million of its $500 million in cash assets. Some have sought to move their money into accounts at one of two national banks run by the Finance Ministry. Those two banks have received new deposits this week totaling $60 million, a ministry official said.
But many others who closed their accounts said they intend to keep their money at home. Only 5 percent of Afghans have a bank account, so this vote of no confidence could be devastating to the nation's fledgling banking sector.
"I would never keep my money in the bank," said Shafaq Gebarn, 31, an employee at the Education Ministry who was among scores waiting outside a Kabul Bank branch this week to cash his paycheck. "I'd rather keep it in a pot at home. I'll get a pistol and two hand grenades to protect it."
For centuries, Afghans conducted financial transactions almost exclusively through the "hawala" system, a trust-based network of money handlers who took cash deposits and arranged for them to be collected by clients' business partners or relatives in other provinces. The deals were sealed with handshakes rather than paperwork.
Even today, some Afghans say they prefer the hawala system because of its personal touch. Bari Hashimi, 50, an executive at a financial company, said he intends to withdraw the $10,000 he has deposited in Kabul Bank.
"These things that have happened in the last week have destroyed our trust," Hashimi said. The hawala system might not be perfect, he added, "but at least if it's a person [you know], you can get your money back by any means."A bar to terrorist funds
Because hawalas operate with no official oversight and produce virtually no paper trail, their popularity was a major concern for U.S. officials after the Sept. 11, 2001, attacks. American officials sought to implement a Western-style banking sector in Afghanistan that would make it more difficult for terrorists to get money, while promising Afghans that a regulated financial system would be more reliable and trustworthy.
Over the past nine years, U.S. officials have spent millions of dollars building Afghanistan's banking sector from the ground up. Treasury Department and USAID officials worked alongside the Afghan Finance Ministry and the government-controlled Central Bank, designing a financial system that now has $3.6 billion in assets.
The first order of business for the fledgling banks was to woo customers. No institution was better at that than Kabul Bank, founded by a pair of investors with glamorous resumes: Sherkhan Farnood, the country's only world-class poker player, and Khalilullah Fruzi, a gem trader. At flashy promotional events, the bank doled out lottery prizes to depositors, a creative way to get around the fact that Afghan banks do not pay interest because the custom is seen as anti-Islamic.
Farnood and Fruzi also had the right political connections, including Mahmoud Karzai, brother of President Hamid Karzai, and Haseen Fahim, whose brother is the nation's vice president. Not coincidentally, Kabul Bank is the government's bank of choice, paying the salaries of 250,000 police officers, soldiers and teachers with a fund of $150 million in government cash.
Behind the scenes, Farnood and Fruzi, who installed themselves as board chairman and chief executive, respectively, were investing depositors' cash in lavish properties in the speculative Dubai market and giving risky off-the-books loans to relatives and friends. These liabilities persuaded U.S. officials to ask President Karzai to order the two executives to step down last week, which they did.'It's just a sham'
The way the bank conducted business, along with the perception that Afghanistan's Central Bank and the U.S. Treasury Department failed to regulate the banking system, have angered Afghans and frayed their trust.
"This is a huge blow," said Daoud Sultanzoy, a parliament member who has railed against corruption. "The free market depends on the most important thing being trust and confidence. . . . This tells people that democracy and the free market do not work. It's just a sham."
Sultanzoy said the Americans set a bad example by bailing out Wall Street firms after their meltdown.
"It's hard for Americans to come here and tell people they're criminals who've done something they haven't done," Sultanzoy said. "The perception among Afghans is that America was complacent and complicit in this, too."
Despite the panic, Afghan Deputy Finance Minister M. Mustafa Mastoor said the banking sector remains strong and fundamentally healthy. The Central Bank and the Karzai administration have pledged their full support, suggesting they would be willing to offer government money for a bailout if necessary.
Echoing complaints from Karzai and other high-ranking officials, Mastoor blamed foreign reporters for instigating the run on Kabul Bank by overstating its problems.
"That is unhealthy for the economy and investment," he said. "There might be a pause between now and the time people come back to the banking sector."
And that pause might be longer than officials hope because the bank's troubles have dampened Afghans' faith in a modern, free-market economy. During the standoff at the Kabul Bank branch Wednesday, angry government workers scuffled with guards from the National Directorate of Security, who used batons to keep the crowd back.
Abdul Samad, an employee of the Ministry of Rural Rehabilitation and Development, said he had not been paid in two months. He needed the money to buy food and presents for Eid al-Fitr, the celebration of the end of Ramadan that begins Friday.
"I told my family if I can't get my money, they will have to sit quietly and we would have no Eid," he said.
Special correspondent Javed Hamdard contributed to this report.