The banking crisis in Afghanistan

After weeks of trouble involving huge losses, behind-the-scenes rows, and allegations of corruption, Afghanistan’s central bank recently seized control of troubled Kabul Bank. Simon Wilson looks at what happened – and how it might affect the country's relationship with the West.

By Simon Wilson

published 17 August 2010

in Features

As layer upon layer of crooked dealing comes to light within Kabul Bank, Afghanistan's first Western-style retail bank, Simon Wilson considers why this matters and how it affects the country's relationship with the West.

What's going on?

Afghanistan's central bank seized control of the troubled Kabul Bank this week. The move followed weeks of trouble rumours of giant losses, behind the scenes rows, and allegations of corruption had led to a run on its assets by account holders, and violent scenes at branches. Meanwhile an investigation has been started into the dealings of the bank's top two shareholders; chairman, Sher Khan Farnood and chief executive, Khalilullah Fruzi. The pair were forced to resign earlier this month over revelations that the bank had lent hundred of millions of dollars to allies of President Hamid Karzai, and poured about $150m into risky property deals in Dubai. Another big shareholder, Mohammad Haseen, a brother of the Afghan first vice-president, Mohammad Qasim Fahim, is also under investigation for suspected irregularities.

The bank is part owned by the president's brother Mahmoud Karzai is the third-largest shareholder. And it donated millions of dollars to Hamid Karzai's re-election campaign. The Washington Post and other influential American newspapers argue that it is merely a tool for the corrupt ruling class. Through it, they launder wealth and enrich themselves as part of a culture in which politics and business are all but indistinguishable. For example, Mahmoud Karzai bought his 7% stake with a $5m loan that the bank provided, and has so far not repaid any of it. Another beneficiary is Marshal Fahim, the Tajik warlord, who is the country's vice-president.

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Its survival is important (argues the central bank chief Abdul Qadir Fitrat, among others) because an all-out collapse would shatter what passes for confidence in Afghanistan's nascent financial system and starve the country of private investment. Besides, Kabul Bank was supposed to be a showpiece financial institution, set up in 2004 as the country's first Western-style retail bank. It boasts 44 branches in Kabul and 99 in the rest of the country. The bank is too important to fail for another, especially urgent reason: its customers include 250,000 armed soldiers. Like most state employees, their salaries are paid via the bank.

The president's brother, Mahmoud Karzai, who made a million-dollar profit on a recent property deal in Dubai, has not yet been accused of any illegality. That's despite question marks over the Dubai empire he has amassed with others (notably ex-chairman, and international poker player, Sher Khan Fernood) using Kabul Bank funds. Nor have any charges been brought against Ahmed Wali Karzai, the president's half-brother. He is the most powerful figure in the Kandahar regime, and also according to widespread and persistent allegations the major player in the country's illegal opium trade. But plenty of other top brass have been caught red-handed.

Earlier this year Mohammad Siddiq Chakari, Afghanistan's minister of Islamic affairs, was accused of extorting millions of dollars from Hajj pilgrimage businesses. He fled the country with help from President Karzai's inner circle. Just last month the president's national security adviser, Mohammed Zia Salehi, was arrested for accepting a kickback ($10,000 and a new car) in return for shutting down a major corruption inquiry. These examples have increased the sense in Washington and other Nato capitals that Western soldiers are fighting to prop up an institutionally corrupt government, and that million of dollars in aid money have been stolen by wealthy power-brokers.

That's the conclusion of some US critics. According to Georgetown University professor Christine Fair, "I don't know how you can disaggregate the way in which [Washington] has funnelled money into Afghanistan from the crisis of corruption that presents itself today we are a government at odds with ourselves." That perception broadened last month when the Obama administration persuaded John Kerry, chair of the Senate Foreign Relations Committee, to suppress publication of a report on Afghan corruption completed last month. Others argue that low expectations have been set for Afghanistan. So the governing premise that Afghans are simply more tolerant of corruption than Westerners has become a self-fulfilling prophecy. Either way, of 180 countries it assesses, Transparency International, the anti-corruption campaign group, ranks Afghanistan 179th. The crisis at Kabul Bank will do little to change that.

For centuries, Afghans have used the traditional 'hawala' system for financial transactions. It's a trust-based network of money-handlers and brokers who accept cash deposits in one town and arrange for an associate to hand them over to the recipient in another town or province. Under hawala, deals are sealed with a handshake. But it is hard to track flows of cash, and the system is obviously prone to all kinds of 'fees', backhanders and money-laundering. The Kabul Bank is a core plank in the US-backed strategy of making it easier to track and halt terrorist funding. The idea is to introduce a Western-style banking system, complete with paper trails and regulatory oversight. But it still has to dish out lottery prizes to depositors, as paying interest is seen as un-Islamic.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.