Karzai Calls Kabul Bank 'Safe' Amid Signs Of Panic

September 3, 2010
Radio Free Europe/Radio Liberty

Afghan President Hamid Karzai has vowed his government has enough money to cover scandal-hit Kabul Bank, which is reeling from the loss of millions of dollars of assets.

The assurance comes as some depositors in the country's largest privately held bank have been prevented from withdrawing money amid a run that followed reports of serious financial woes.

"[Kabul Bank] is safe and people should not be concerned," Karzai said on September 2. "The Afghan government and the central bank are supporting this bank. This is one of the biggest banks of Afghanistan. Today, the Finance Ministry transferred $100 [million]-$150 million to Kabul Bank."

He said the transfer would assure that the bank, which the government uses to pay the monthly salaries of some 250,000 officials, will cover this month's payroll.

Karzai's assurance -- the strongest he has issued yet in the crisis -- comes amid reports that many depositors have already withdrawn money from the bank amid fears it could collapse.

Khalilullah Feruzi, one of the two largest shareholders of Kabul Bank, told "The New York Times" on September 2 that depositors had withdrawn $180 million over the course of two days. "If this goes on, we won't survive," he told the paper.

Fridays are bank holidays in Afghanistan.

Holes In The Portfolio

The partial run on the bank follows the resignation of the bank's chairman, Sherkhan Farnud, and chief executive Feruzi on August 30.

The resignation of the two men, both major shareholders of Kabul Bank, came after the Afghan central bank discovered evidence that the private financial institution had lost some $300 million in speculative investments and other dealings.

Among those investments was paying $160 million for houses and offices in Dubai at the height of the global real estate boom in 2007. After the real-estate market collapsed, the prices of the properties plunged, reducing the value of the bank's assets.

Farnud reportedly lent money to both to himself and to influential people with ties to the government. Among the loans was a reported $100 million to Hasin Fahim, the brother of Afghan First Vice President Mohammad Fahim.

The bank helped funded Karzai's presidential campaign last year with large but unknown amounts of money. Karzai's brother, Mahmood, is one of the bank's shareholders.

Throughout these alleged dealings, Farnud is reported to have clouded his operations in secrecy, making it difficult to ascertain the true value of his bank's holdings.

Retail Depositors

The crisis at Kabul Bank concerns thousands of ordinary Afghans as well as the country's powerful elite, because the bank was popular among small savers, including public-sector workers, police, and soldiers.

Kabul residents interviewed on September 2 near the bank's downtown headquarters showed a range of emotions over the crisis.

"We have heard that this bank had losses in Dubai and there are differences among the managers of the bank," Tela Ahmadzai told RFE/RL's Radio Free Afghanistan. "I hope the government will do everything possible to explain to the people what has happened and try to save the credibility of the Afghan banks."

"According to the information given by the president of the Afghanistan Bank [central bank], there is no problem with the Kabul Bank," said another resident. "There is only a change of leadership in this bank. He gave assurance to the people through media, and I believe, Inshallah, everything is OK."

The president of Afghanistan's central bank, Abdul Qadir Fitrat, has assured the public that the state bank will fully support the troubled financial institution. He has also said Kabul Bank has no liquidity problems.

Questions Looking Forward

A central bank official, Masood Khan Musa Ghazi, has been appointed as Kabul Bank's new chairman.

The troubles at Kabul Bank are a major blow to U.S-backed efforts to create a stable banking system in Afghanistan that can help fuel the country's economic growth by amassing capital for local investment.

The troubles also raise questions about whether other closely-held private financial institutions may have followed similarly irresponsible patterns of lending or investing money both for financial and apparent political gains.

In the case of Kabul Bank, at least some of the villas purchased in Dubai were reportedly offered to Farnud's politically connected friends and allies for negligible prices. Many of the villas are occupied by prominent Afghans, like former Vice President Ahmad Zia Masud and Mahmood Karzai.

As the Kabul government now moves to contain the Kabul Bank crisis, Washington has signaled it has no plans of its own to guarantee the bank's viability.

White House spokesman Tommy Vietor told reporters in Washington on September 2 that "we are taking no steps to bail out Kabul Bank."

"We support the Afghan central bank's efforts to uphold international standards on transparency and its decisive action in response to reports of fraud at the Kabul Bank," Vietor said.