| | Afghanistan urged to stress test banks FT.com
09/09/2010
By James Lamont
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Confidence in Afghanistan’s banking system needs to be urgently addressed by conducting stress tests on the country’s fragile banking sector in the wake of the scandal at Kabul Bank, Ashraf Ghani, the former finance minister and presidential candidate, has told the Financial Times.
Mr Ghani, a former World Bank official and well respected Afghan politician, warned of the threat of contagion across the banking sector unless the Da Afghanistan Bank, the central bank, acted quickly and decisively to stem the damage from Kabul Bank’s woes.
“There is a threat of contagion to the rest of the banking sector,” Mr Ghani said on Tuesday night from Washington.
“We have to address how we restore confidence to investors and depositors. There are serious consequences when 1.2m depositors are left with a wave of panic. Everyone is going to think twice [about putting money in a bank].”
US, European and Indian regulators have undertaken stress tests since the global financial crisis, checking bank balance sheets to see how much financial pressure they can withstand in a simulated future crisis.
His comments came as Afghan security forces clashed with angry depositors outside a bank branch in Kabul as they sought to withdraw their savings.
In the past days, Afghanistan’s financial institutions have stepped in to stop a run on Kabul Bank, the country’s largest lender, as customers withdrew about 60 per cent of the bank’s cash deposits after its two top executives were ousted amid corruption allegations.
Abdul Qadir Fitrat, the central bank governor, has tried to calm nerves amid the country’s biggest test of banking regulation since the fall of the Taliban in 2001.
First, he vowed that the central bank and the finance ministry would protect depositors’ money. He has given assurances the bank is “well-capitalised, highly liquid, profitable and safe and sound” in spite of allegations that the bank’s management agreed loans to shareholders to buy shares in the bank and make risky property investments in Dubai .
Earlier this week, the central bank froze the assets and property of the bank’s biggest shareholders and borrowers. These include Sherkhan Farnood, Kabul Bank’s Dubai-based former chairman and one of Afghanistan’s richest men, and Khalilullah Ferozi, the former chief executive. The two men, who resigned last week, are the bank’s largest shareholders, holding 28 per cent each.
Mr Ghani said the banking crisis had been precipitated by an environment of lax financial regulation and leadership of financial institutions that had little experience of running banks or regulation.
Reviving the formal banking sector was a priority of Afghanistan's internationally-funded reconstruction effort. The formal banking system, and its regulation, barely existed before 2001. Kabul Bank, founded with $5m in 2004, was the frontrunner of a new era of financial services, and had marketed itself heavily to small depositors across the country.
Mr Ghani, who coordinated the Kabul Conference in July, described Kabul Bank as a “time bomb”. He said its risks had become evident as long as three years ago, but that the central bank had either failed to grasp the extent of the problem or chosen not to act.
However, the former finance minister struck an optimistic note, saying that a banking crisis was an opportunity for Afghanistan to mend the system, put in place better regulation and learn from financial crises in other parts of the world.
“There’s an opportunity to really sort out the banking sector,” he said. “You can be better off from a banking crisis if you implement reforms. There’s no shortage of money and the country can absorb the shock if there is the right structure in place.”
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