Afghan officials agree to dissolve Kabul Bank, under pressure from U.S. and IMF

Under heavy pressure from the United States and the International Monetary Fund, officials at Afghanistan’s Central Bank agreed this month to start dissolving the embattled Kabul Bank, Afghan officials confirmed Saturday.

The institution, the largest private bank in the country, became a symbol of the country’s entrenched culture of corruption and cronyism this fall after the disclosure of a series of loans that bank executives and shareholders had been taking out to invest in risky ventures.

These included seafront mansions in Dubai, one of which was made available at no cost to Mahmoud Karzai, a Kabul Bank shareholder and a brother of President Hamid Karzai.

The crisis has become a key test of the Afghan government’s ability and willingness to tackle the rampant corruption that has undermined support for the war, in the United States and in NATO capitals. The decision to dissolve the bank suggests that the government, which is heavily reliant on foreign aid, realized the banking crisis threatened the funding of key government programs.

The chiefs of the government-run Central Bank, which regulates the country’s banking sector, passed a resolution this month recommending that Kabul Bank be put in receivership, Finance Ministry officials said. That process, which must be approved by a government committee, would separate the bank’s deposits and performing loans from investments and loans unlikely to be repaid.

“We need to know how much the loss is so we can determine how to respond to the losses,” Deputy Finance Minister Mohammad Mustafa Mastoor said in an interview Saturday, explaining why the government has come to see receivership as the best option. “This will lead to the strengthening of our banking system.”

The government would then seek to find a buyer to assume the deposits and good assets, which would be used to start a new bank, he said. The bad assets would be liquidated.

Officials hesitant

The IMF and the United States have pushed for Kabul Bank to be put in receivership, seeing the move as the fastest and most effective approach to restoring confidence in Afghanistan’s poorly regulated banking sector.

The Central Bank took control of the bank abruptly after the scandal broke in September and was forced to inject hundreds of millions of dollars to keep it afloat as customers pulled their savings, fearing a collapse.

After taking control, Central Bank officials argued that Kabul Bank should remain in conservatorship — run by the Central Bank — for a few years until it could be stabilized and sold off.

They were wary of putting the bank in receivership, fearing the news that the bank would be dissolved could trigger a new run on the bank by depositors. The government has assured customers that their money is safe. Central Bank officials also voiced concern about the political fallout that would probably result from the type of thorough accounting typically conducted when institutions are placed in receivership.

But international pressure to put the bank in receivership grew stronger last month.

The IMF, which suspended its program in Afghanistan last fall as a result of the scandal, sent a delegation to Kabul in early February to review the steps the country had taken to restructure the banking sector. The absence of an IMF program has put at risk millions of dollars in foreign aid earmarked for Afghanistan by nations that do not spend development money in countries where the organization does not provide some oversight.

In a statement issued Feb. 15, the IMF urged Afghan officials to take “immediate measures” to solve the crisis, including prosecuting those who committed fraud. The statement called receivership “the most appropriate mechanism for successful resolution of the bank.”

The following day, U.S. Treasury Department Deputy Secretary Neal S. Wolin visited Kabul to meet with President Karzai, the country’s finance minister and the head of the Central Bank. Wolin urged the Afghans to take “swift and decisive action to ensure a credible, effective resolution of issues related to Kabul Bank,” according to a Treasury Department statement.

U.N. Secretary General Ban Ki-moon highlighted the trouble at Kabul Bank as one of the two most worrisome crises facing the country in his March 9 report on Afghanistan to the U.N. Security Council.

“If no agreement is reached on the Kabul Bank and the terms of a new IMF country program, bilateral donors may have to suspend or redirect their assistance,” he wrote. “The protracted delay in resolving these issues threatens to undermine the Government’s vision for economic growth and the progress it has made in developing national priority programs.”

Board backs move

The Central Bank’s board of directors endorsed putting the bank in receivership after meetings on the bank’s future March 15 and 16. Central Bank officials declined to comment for this story.

Their recommendation will be submitted in coming days to the Financial Disputes Resolution Commission, a government body that will rule on whether the proposed course of action is legally sound, a commission member said. If the commission gives the green light, the dissolution of the bank could begin within weeks.

Some questioned whether the government would go through with the plan, mindful of instances in which political leaders have thwarted attempts by bureaucrats to implement change.

“There is a lack of political willingness to take on this issue,” parliament member Fauzia Kofi said. “Businesses will be damaged. Reputations will be damaged. People will have to be put on trial for these issues.”

Kabul Bank’s founder and chairman, Sherkhan Farnood, and its chief executive, Khalilullah Fruzi, were removed from their posts this past fall and have been barred from leaving the country.

Mahmoud Karzai, the president’s brother, said he is among the shareholders who has committed to pay back the loans he took out. A U.S. citizen, he is reportedly under investigation by federal prosecutors in New York for possible tax evasion — an accusation he has denied.

“The money should be traced, and whoever acted improperly and conducted criminal activities should be brought to justice,” he said in an interview Saturday. “It’s time the laws in Afghanistan are taken seriously.”

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