| | Afghans Pull Money From Weakened Bank The New York Times
09/02/2010
By Dexter Filkins
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KABUL — One of the principal owners of the Afghan bank at the center of an accelerating financial crisis here said depositors had withdrawn $180 million in the past two days. He predicted a “revolution” in the country’s financial system unless the Afghan government and the United States moved quickly to help stabilize the bank.
Khalil Frozi, one of the two largest shareholders of Kabul Bank, said reports indicating that the institution had lost as much as $300 million were overstated. But he predicted that if Afghan depositors continued to withdraw their money at the current rate, then Kabul Bank would almost certainly collapse — undermining confidence in the nascent financial system Afghanistan has been trying to build with American help.
“If people lose their trust in the banks, then we will have revolution in our financial system,” Mr. Frozi said in an interview. “We need the Afghan government and the U.S. government to support us. That is essential.”
The news came as Afghan leaders took the first steps toward arresting the panic, which began earlier this week when the country’s top banking officials demanded the resignations of Mr. Frozi, the bank’s chief financial officer, and of the bank’s chairman, Sherkhan Farnood.
Afghan and American officials say the two men presided over the bank in a reckless and free-wheeling manner, doling out millions to allies of President Hamid Karzai and pouring money into risky investments that went bust. The bank’s nosedive — and the corruption associated with it — are posing a direct challenge to the country’s fledgling financial system, which was built under American guidance following the collapse of the Taliban government in 2001.
In a news conference here, President Hamid Karzai promised that the Afghan government would guarantee all deposits at the threatened institution. He said the Afghan government had already given Kabul Bank more than $100 million to ensure that it could pay the salaries of some 250,000 public employees. The bank administers the payments for the government.
“People don’t need to be worried,” Mr. Karzai said. “We’ve got enough cash to support the bank.”
“Even if the whole financial system in Afghanistan collapses, we have enough money to support it,” he said.
Mr. Karzai, who appeared with Secretary of Defense Robert M. Gates, said the crisis had been invented by the Western press, which he said had raised baseless fears among ordinary Afghans.
“The Western press has been covering it in a negative and provocative way,” he said of Kabul Bank’s troubles.
Still, it was not clear that the Afghan government had the legal authority to guarantee Afghan deposits, or the financial wherewithal to shore up the banking system if confidence were to collapse.
Mr. Frozi said Kabul Bank retained about $1.1 billion in deposits. That figure alone would represent a quarter of Afghanistan’s foreign currency reserves, which Mr. Karzai said totaled $4.8 billion.
If the loss of confidence spread beyond Kabul Bank, it seemed almost certain to strain the resources of the Afghan government —and make it more likely that the Americans would be forced to intervene. There were no indications yet that the panic was spreading, but American and Afghan officials say privately that other Afghan banks might face similar troubles.
For now, American officials ruled out any direct financial assistance. They said they were providing technical assistance to the Afghan government but nothing more.
“We are taking no steps to bail out Kabul Bank,” a White House spokesman said. “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.”
Most Afghans do not keep their money in the banking system, and Kabul Bank is tiny by international standards. But creating a credible and stable banking system is an important goal of the American-led effort in the country, which is seeking to help Afghanistan develop a modern economy.
Kabul Bank, one of the biggest private financial institutions that sprang up after the fall of the Taliban, stands at the very center of Afghanistan’s political and economic elite. A brother of Mr. Karzai, Mahmoud, is a major shareholder, as is Haseen Fahim, the brother of the country’s vice president. The bank lent Mr. Fahim, a prominent businessman, as much as $100 million, officials say.
The bank helped finance President Karzai’s re-election campaign last year, giving him as much as $14 million, according to former senior Afghan officials. Mr. Karzai, in turn, chose the bank to administer much of its payroll, which Mr. Frozi desribed as one of the bank’s most lucrative fields of business.
Afghan and American regulators say that it is these very connections that shielded the bank from official scrutiny for so long.
Rod Nordland and Sharifullah Sahak contributed reporting.
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