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Combating Extremism in Afghanistan and Pakistan | Full Coverage

Kabul Bank crisis followed U.S. push for cleanup

The rapid turnabout in Kabul Bank's fortunes has led Afghans to question Western-style free-market capitalism.

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By Andrew Higgins
Washington Post Staff Writer
Friday, September 17, 2010; 7:42 PM

WASHINGTON - Late last month, a small team of U.S. Treasury Department experts rushed to Kabul ahead of a debacle Washington hoped wouldn't happen, but inadvertently helped create.

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The three-man "quick response team" arrived in the Afghan capital on Aug. 31 - a day before Afghan depositors began clamoring for their money back from Afghanistan's largest, most politically potent and also dangerously freewheeling private bank.

The unraveling of Kabul Bank, which last week led to violent clashes between security forces and civil servants trying to withdraw their salaries, has hammered the credibility of President Hamid Karzai - whose brother is a major shareholder in the bank - and battered a central pillar of the U.S. strategy for bringing economic and political stability to Afghanistan.

The Treasury Department and the U.S. Agency for International Development, or USAID, which have both worked closely with the Afghan Central Bank, say it was never their job to scrutinize the misdeeds of individual Afghan banks but to focus on training Afghans to do that work.

But interviews with Afghan and American officials as well as Kabul Bank's principal shareholders make clear that the United States played a key role in persuading Afghan authorities to finally rein in Kabul Bank at the end of August, a move that many Afghan businessmen viewed as long overdue but which also triggered a run on the bank.

The current mess and months of earlier indecision about how to deal with Kabul Bank illustrate the perils created by a deeply distrustful but mutually dependent relationship between Washington and Kabul. U.S. officials are wary of pushing the Afghan government too hard for change but also have an excuse for inaction on discomfiting, politically sensitive questions seen as best answered by the Afghans. At the same time, Afghan officials are heavily reliant on American aid and expertise, but often feel shielded from the need to make tough decisions on their own.

When depositors first started thronging Kabul Bank to pull their savings on Sept. 1, Mahmoud Karzai, the president's brother, demanded that the United States "do something" to bail out the bank. At the same time, he fumed that American officials had engineered the crisis at Kabul Bank so as to hurt his brother.

In the end, Kabul Bank may have been saved, or at least given a temporary reprieve, by divine intervention: a long holiday to mark the end of Ramadan, the Islamic holy month, prevented depositors from yanking their funds. When the bank reopened for business this week, much of the previous panic had subsided.

But the bank's future is far from certain as Afghan authorities work to disentangle a web of illicit loans, and big questions remain: What pushed Kabul Bank to the brink of collapse, and why did it take so long for both Afghan and American officials to try to get a grip on a critical financial institution whose unorthodox practices had been an open secret in Afghanistan for years? These included big, risky bets on Dubai real estate and large concealed loans to Kabul Bank's own shareholders well beyond the legal limit.

"Everyone knew this mess would happen one day, but no one did anything," said an Afghan businessman, who recalled warning President George W. Bush's ambassador to Kabul, Zalmay Khalilzad, to watch out for Kabul Bank. "This thing is going to make you cry someday," the businessman said he told Khalilzad. Khalilzad did not respond to a request for comment.

A U.S. official who asked not to be named because of the sensitivity of the matter said that the Treasury Department - which has about 20 staffers stationed full time in Afghanistan - collected detailed information about possible improprieties by Kabul Bank and earlier this year urged the governor of the Afghan Central Bank, Abdul Qadir Fitrat, to take corrective action.

This information flowed in part from Kabul Bank's own senior executives following a bitter rift over the summer between the bank's chairman, Sherkhan Farnood, and its chief executive, Khalilullah Fruzi. Both Farnood and Fruzi have since been forced to step down but remain the bank's biggest shareholders.


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