Behind the Afghan Banking Crisis

To clean up Afghanistan’s banking system, the World Bank wants to fund an audit of the 10 main private banks. But their doors remain closed, writes Louis Imbert.

The governor of the Afghan Central Bank, Abdul Qadir Fitrat, announced his resignation this June in a hotel in the Washington suburbs, claiming he had fled to the United States in fear of his life. In April he had revealed to the Afghan parliament with names and figures to back his claim an unprecedented financial scandal at the Kabul Bank, the country’s biggest private bank, which almost went bankrupt in August 2010.

According to the Central Bank’s latest calculations, the directors of the Kabul Bank lent and lost deposits worth $579m in six years. Including interest and loans disguised as administrative costs, the sum rises to $914m. Relative to the size of the Afghan economy, whose real GDP, according to the IMF, will barely exceed $7bn in 2011, the scale of these losses is without precedent. They highlight the endemic corruption in Afghanistan and the inability of Hamid Karzai’s government to tackle it. Three years from the scheduled withdrawal of US troops, every entrepreneur wants to profit from international aid while the tap is still running.

The story of the Kabul Bank “is all the sadder since the banking sector was considered until recently to be one of the very rare successes in the country’s reconstruction,” according to William Byrd, former director of the World Bank in Afghanistan. Among the beneficiaries of the Kabul Bank’s largesse are Karzai’s brother, Mahmoud, and a brother of the vice-president, Marshal Mohammad Qasim Fahim. A Central Bank inquiry found 207 recipients, including members of parliament, ministers, provincial governors, artists, a football team and political campaign managers.

In the half-hour after the announcement of Fitrat’s resignation, Hamid Karzai’s office called it “treason,” and a warrant for his arrest was sent to Interpol and the US embassy in Kabul: Fitrat’s name was top of a list of suspects which the office of the Afghan chief prosecutor has been sitting on for a year. The decision was also taken to imprison Sherkhan Farnood, the bank’s founder, and its president, Khalilullah Ferozi, in Kabul. So far no trial has begun.

According to various sources, the Afghan Monitoring and Evaluation Committee (MEC, formerly the High Office of Oversight and Anti Corruption) has however cleared the names of Mahmoud Karzai and Abdul Hassin Fahim, both shareholders in the bank, on condition that they repay the sums officially considered as fraudulent loans: Karzai received $22m, and three companies in which Fahim was a shareholder benefitted from loans totalling $182m. Mahmoud Karzai called Farnood, his former associate, “a thief, a criminal who should have been judged long ago,” and said he was “sick and tired of the government’s delay” in launching a trial.

The Kabul Bank has become the pretext for a standoff between the Afghan government and the IMF. Since March the IMF has blocked the payment of international aid to the state budget: It has asked the government to absorb the bank’s losses — only $70m had been recovered by July — and is demanding reform of the banking system and a proper trial. As Andrew Wilder, an Afghanistan specialist at the US Institute of Peace, a research centre of the US Congress, points out, the Afghan government is in desperate need of that money so as not to be short of cash within a few months. In October the Afghan parliament assented to a refinancing plan for the Central Bank and accepted an initial payment of $51m. So the IMF may agree to restart its aid programme in November.

Farnood, Kabul Bank’s founder and the man who allowed the powerful to help themselves to the bank accounts of 1.3 million Afghans, started from nothing. Born into a poor family in the north of the country, he became a poker player of international standing: The internet site, World Series of Poker Tour, credits him with winnings totalling nearly $400,000 between 2005 and 2008. He dreamed of being the founder of an industrial and financial empire. He has spent most of his adult life abroad: first in Moscow where in a student room in the 1980s he founded a money transfer company that capitalised on imports of Afghan fabric into Russia. According to a former NATO official in Afghanistan, in 15 years he succeeded in extending his network through Central Asia, Pakistan, Iran and China, and as far as Europe and California.

He became part of the traditional Muslim hawala networks — a money transfer, credit and exchange system outside the banking sector that leaves no paper trail behind. A Drug Enforcement Administration investigator has alleged that in the 1990s Farnood, then based in Dubai, transferred money for legitimate businesses, but also laundered money for the Taliban, drug-dealers and al-Qaida.

After the fall of the Taliban regime in 2001, the United States encouraged the creation of banks. The country had only two at the time, both nationalised and ailing. “The regulators were relieved to see real banks being set up in Kabul,” explained Byrd. “Foreign donors thought they would be subject to international regulation.” Sherkhan Farnood was the first to request a licence. He got it in 2004.

This is a story of trust, “an act of faith” according to Noorullah Delawari, then head of the Central Bank. To convince his fellow countrymen to take their savings from under their mattresses, Farnood displayed a flair for showmanship rare in finance: Two Indian actresses promoted his credit cards on TV and he organised huge lotteries in marriage halls that he called Bakht (luck in Dari), open to anyone who deposited $100 in a Kabul Bank account. “Farnood was giving away cars, apartments, cash,” Anwar-ul-Haq Ahady said. Ahady is the current business minister and signed the licence for the Kabul Bank. “He knew how to draw attention to himself: He was able to use techniques that he had seen elsewhere in the Middle East.”

In two years, his system caught on. Farnood recruited new business partners, among them the country’s elite: He lent $6m to Mahmoud Karzai to acquire a 7% share in the bank. Coming from a poor family of Tajik and Uzbek descent, Farnood “didn’t belong to a tribe, he had no backing from anyone,” Delawari says. “By bringing Mahmoud Karzai on board, he thought he’d bought an insurance policy.”

This July the deputy chief prosecutor listed 413 fraudulent loans made by the Kabul Bank, mainly to its own shareholders and often without interest or repayment schedules. Most were to front men, such as security guards, gardeners, household staff. The bank was opening new branches, including in the Pashtun south where the Taliban had returned in force in 2005. The state was also using the Kabul Bank to pay civil servants’ salaries, including those of the army and police. Such contracts would become more numerous after the election of 2009, which returned Karzai to power. “They were very fortunate when they were chosen as a conduit for government salaries,” says Wilder. “They used the money creatively” by delaying paying civil service salaries so as to benefit from the interest for longer, and reinvesting the money in diverse sectors.

The money may have been flowing into the coffers, but it did not stay there long. Farnood had an empire to build. He invested in cement with Mahmoud Karzai, in a television channel ($1.8m), petrol retailing ($21m) and Kabul real estate; and $98m went, between 2009 and 2010, into Pamir Airways, the airline with the slogan “Fly with confidence.”

Farnood could afford to swagger: When he flew to Dubai he took his own airline and sold seats at a loss to ruin the competition a ticket from Kabul to Dubai sold for $50. The adventure ended in May 2010 in the Hindu Kushwhen one of the company’s aged Antonov 24 planes crashed, killing 44 passengers. It was said to have been flying with fake documentation.

On the day after the accident, Khalilullah Ferozi, a director of the bank since 2008, organised a press conference to present widows who had received compensation, and accused NATO air traffic controllers of being responsible for the deaths. Ferozi had also spent a long time in Russia, training at the police academy in Ufa (Bashkortostan), then working for Ahmad Shah Massoud’s Northern Alliance, before joining the Kabul Bank as head of security.

This son of a poet with bleached hair and a bodybuilder’s torso explained his unorthodox view of banking last year: “All business is risky in Afghanistan. We don’t have a lot of time. Every day the balance of power changes,” adding that “when the Americans have gone, there’s going to be a lot less money to do business with.”

After Ferozi stepped into the limelight, sightings of Farnood in Kabul became rare. He seemed to have withdrawn to Dubai. According to a former US NATO official: “Farnood lost control of the bank for a couple of years. It had always worked as a Ponzi scheme, but Farnood tried to control it by bringing in legitimate businesses simultaneously. Ferozi just took [money] out,” after he dealt with Karzai and Fahim to take control of the bank, the official says. In August 2010 the Central Bank demanded their resignation, citing losses of $300m incurred on the Dubai property market. The prospect of bankruptcy caused a run on the Kabul Bank. The Central Bank was forced to refinance it to the tune of $825m, in several installments, in September 2010.

According to the deputy chief prosecutor, the state is currently trying to sell off $300m worth of assets in the emirate that belong to the Kabul Bank. Ferozi has 35 luxury villas, costing $160m, in Palm Jumeirah. President Karzai freed Ferozi and Farnood last September after barely two months in prison. They are supposed to be helping to locate further assets that can be sold.

Colin Cookman, a researcher at a Washington thinktank, the Centre for American Progress, pointed out the surprise of the Kabul Bank’s near-bankruptcy: “The bank’s collapse had virtually no effect on the Afghan economy.” It did not cause a major crisis because the bank was not deeply rooted in the economy; it financed few genuinely productive investments and behaved as a currency speculator. It was simply a money pump.

President Karzai blames foreign regulators who were blindsided but refuses to get too involved. During the crisis, he authorised inquiries by the Central Bank and MEC, before doing a U-turn and asking Kabul Bank shareholders to give back the money rather than testify before the Central Bank investigators. He has banished all western advisers from the Central Bank, according to a report by the US inspector general for Afghan reconstruction.

To clean up Afghanistan’s banking system, the World Bank wants to fund an audit of the 10 main private banks. But their doors remain closed. The Azizi Bank, the second largest private financial institution, is also suspected of having incurred large losses in Dubai since 2008. President Karzai summoned a main shareholder in 2009 along with the president of the Kabul Bank to question them on their losses. Both were able to set his mind at rest and get back to business.

Louis Imbert is a journalist.

Copyright © 2011 Le Monde diplomatique

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