Pressure for a rescue of Kabul Bank

Beta V.1.0 - Powered by automated translation

The government of Afghanistan faced mounting pressure yesterday to bail out its largest commercial bank as customers rushed to withdraw their savings amid rumours of cronyism and investments in Dubai’s troubled property market. Kabul Bank saw its cash reserves decline by more than US$180 million (Dh661.1m) on Wednesday and Thursday last week. It had $500m of cash and more than $700m of loans as of last Wednesday morning. The bank had total deposits of $1.3 billion.

“I don’t know what’s going to happen but I’m sure that the government will provide any cash that is needed,” said Mahmoud Karzai, the third-largest shareholder of Kabul Bank and a brother of the Afghan president, Hamid Karzai. “I met with the central bank and they have said they are supporting Kabul Bank, but people are still withdrawing.” Mahmoud Karzai said the government could acquire Kabul Bank’s $760m portfolio of loans as a way to inject cash into the lender.

The run on Kabul Bank began after it was disclosed its top two officials were removed from their positions because of a new rule that prevented shareholders from holding executive positions. But it also emerged that Sherkhan Farnood, the chairman, and Khalilullah Ferozi, the chief executive, had been involved with more than $140m of investments in villas on the Palm Jumeirah and land in Business Bay in Dubai. The Washington Post first reported the deals in February.

Mahmoud Karzai said last week the men were removed from their posts because of “improper transactions”. He has lived in one of the properties bought with Kabul Bank funds but has said he is moving to a new house after the scandal. Mr Farnood and Mr Ferozi did not respond to requests for comment yesterday. The Afghan government has already deposited an extra $100m with Kabul Bank so it can meet payroll obligations for the 250,000 government employees who are paid through the bank. It has also pledged to guarantee deposits and said it fully backed the bank.

With customers lining up to close their accounts at branches across the country on Saturday and yesterday, the bank could run out of cash within a week unless the government steps in or confidence is restored, an analyst in Kabul said. “Tension is growing. People are very upset,” said Haroun Mir, the head of Afghanistan’s Centre for Research and Policy Studies. “The anger is not just directed at the bank but the political system. People have abused their influence to bring this kind of situation into the banking system in Afghanistan.”

The expected start of Eid al Fitr on the weekend could put even greater stress on the bank as people traditionally withdraw extra cash to celebrate the holiday. Without government support, the limited financial crisis could erupt into a social problem, Mr Mir said. “If they can’t pay people, it could result in violence.” But depositors’ money would probably be paid because so many government officials were connected to the scandal being uncovered at the bank and their own financial prospects were tied up with the bank’s fate, Mr Mir said.

The larger issue for Afghanistan is whether the incidents at Kabul Bank will have wider repercussions in the efforts of western governments to make the country a functional democracy with its own economy.