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Financial Crisis

Kabul Bank: A Bank that Defaulted on Trust

DOHA, Mar 5 2013 (IPS) - Afghanistan’s Kabul Bank is back in the news, with the sentencing of two of its top executives to five years in prison for fraud. But being in the limelight – for good or bad – has been part of the bank’s saga since its inception in 2004.

Billed as “the bank for everyone”, the bank’s advertisements featured on international television channels showcased a lifestyle that few Afghans could resist. It evoked both trust and awe as its ads constantly showed images of houses, cars and even gold bars it purported to give away.

Suddenly, Afghans who had been distrustful of banks took money they had stored in their homes for decades and opened accounts at the financial institution. The aspirational promises quickly drew in more than one million depositors.

But by summer 2010, the rumblings of something amiss at the nation’s first private bank became too loud to ignore.

Indebted and embarrassed

On August 29, 2010, Abdul Qadir Fitrat, then head of Afghanistan’s Central Bank, convened a meeting of Kabul Bank’s shareholders to discuss what had brought an institution seen as an overwhelming success by Afghans and foreigners alike to the verge of collapse.

The bank has since been replaced by the New Kabul Bank, with the government investing more than 800 million dollars. But the fallout of the collapse of the first bank is still being felt.

Nearly three years later, a series of investigations detailed how massive off-book loans, lavish purchases and 114 rubber stamps used for fake companies helped contribute to the embezzlement of more than 900 million dollars from Kabul Bank.

The image of the “bank for everyone” was quickly replaced with one of “crony capitalism” forming a “Ponzi scheme” that affected nearly everyone in the Central Asian nation.

The scandal left Jawed Rassool, an operations manager at a construction company, broke and indebted. The 27-year-old said the media coverage of the corruption soon locked his employer out of access from its accounts. As a result, “I wasn’t paid for four months,” he told Al Jazeera.

“I am not a very wealthy man. I cannot afford not to have money to feed my family for one month, and never four months … I borrowed 7,000 afghanis (136 dollars) to pay for electricity, firewood and other expenses.”

While the bank’s CEO was reported to have gone on shopping sprees at Louis Vuitton and Versace with money from the bank, Rassool languished.

A November 2012 report, published by the Independent Joint Anti-corruption Monitoring and Evaluation Committee (MEC), found that 92 percent of the bank’s loans, or 861 million dollars, were extended to just 19 individuals and businesses.

Seema Ghani, executive director of the MEC, said that along with a loss of faith in the banking industry, the Kabul Bank scandal left many people without essential services.

“Kabul Bank was a trusted institution that millions of Afghans relied on to receive their salaries and secure their savings … The fact that the government stepped in with an 825 million dollar infusion of funds has simply meant the cost of the fraud has been dispersed to all Afghans,” Ghani told Al Jazeera.

Sophisticated smuggling

In interviews with Al Jazeera, researchers, bank officials and journalists said a combination of low capacity, lack of due diligence and political influence allowed the Kabul Bank to perpetrate its fraudulent activities for more than five years.

Kabul Bank also had timing on its side: an influx of international aid, expanded public services and new entrepreneurial businesses after the fall of the Taliban all increased the need for banking services.

This growth in demand for financial services “drastically outstripped the capacity to effectively regulate and supervise the industry, resulting in vulnerabilities that were (further) exploited by participants in the Kabul Bank fraud,” said Ghani.

“The scale and level of sophistication of the scheme in Kabul Bank was quite astonishing,” Martine van Bijlert, co-director of the Afghanistan Analyst Network, told Al Jazeera.

This sophistication included innovative plots to smuggle 861 million dollars into banks in 28 countries. The 2012 report by the MEC cited the use of 10 pilots at Pamir Airways, which the bank had a stake in, who were paid annual salaries of over 300,000 dollars to transport money through the airline’s food trays. These costs, dated from March 2008 to November 2010, were categorised as “pilots of cash delivery”.

A further 66.2 million dollars was used for the purchase of 250 cars and motorcycles, false deposits, and payments to employees either unqualified for their positions or who simply did not work for the bank.

And a 2009 report by the Afghan spy agency found that Kabul Bank funds were being used to build a property portfolio in Dubai whose value was estimated at 151 million dollars.

These details depicted what van Bijlert called “a group of people who found it completely normal that their connections and wealth would earn them (no interest) loans or gifts.” Among those accused of receiving loans are the brothers of Afghan President Hamid Karzai and First Vice President Marshal Fahim.

Protecting itself

Tuesday’s sentencing of Sher Khan Farnoud, the bank’s founder and chairman, and Khalilullah Ferozi, chief executive of the bank, has done little to restore faith in what people see as a corrupt system.

Shamsul Rahman Shams, head of the special tribunal investigating the bank, said Karzai’s and Fahim’s brothers still owe nine million and three million dollars, respectively.

Neither Mahmoud Karzai – the bank’s third-largest shareholder – nor Hassin Fahim has been formally charged with wrongdoing.

“It’s not as simple as the president and vice president protecting their brothers. It’s the system protecting itself,” said van Bijlert.

Nor are they the only ones allegedly involved. Kabul Bank reportedly made contributions to between 30 and 40 members of parliament. “Many people are somehow implicated,” said van Bijlert.

The response to the scandal has been plagued by delayed or inadequate investigations, and reluctance to pursue the routes that money took out of the country and to prosecute those responsible.

This, says van Bijlert, illustrates how the entire process has become “an exercise in containment,” to limit the blame to a carefully chosen group.

This highlights a perception among the general population that the perpetrators and beneficiaries of the Kabul Bank fraud have not been properly investigated and that decisions to indict were not made transparently – a view the MEC shares.

With the bank’s bailout, funded by international donors, amounting to nearly six percent of the nation’s GDP, Dawood Azami, an Afghan Young Global Leader at the World Economic Forum, said “the Kabul Bank crisis should be a big enough shock for the whole governance structure in Afghanistan to wake up and respond to challenges on time.”

But Noorullah Delawari, governor of the Afghan Central Bank, said Kabul Bank is not an entirely unique situation. “The whole world is facing massive banking issues and each country has had difficulty dealing with it.”

Though he agrees with the findings of an audit prepared by the Kroll investigative firm that the bank was “a well-concealed Ponzi scheme,” Delawari says Da Afghanistan Bank is working with a receivership to recover as much of the lost funds as possible.

In an interview with Al Jazeera, Delawari said that within the “next few weeks” the total amount recovered by the receivership would total 225 million dollars, which he cites as a major improvement over his predecessor, Abdul Qadir Fitrat, who fled to the United States in June 2010, saying the investigation was putting his life in danger.

“Only 20 million dollars had been recovered when I came on board” in November 2011, Delawari said.

Still, the sting of the scandal continues to reverberate in Afghanistan and abroad. “Although the public and investors got their money back after it was seized by the authorities, many people think twice before depositing their money in the banks,” said Azami.

For Ahmad Barak, the initial corruption and the mishandling of the subsequent investigation into Kabul Bank are indicative of an unchanging fact of life in modern Afghanistan.

“This is Afghanistan. You are an idiot if you do not steal money.”

* Published under an agreement with Al Jazeera.

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