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Kabul Pledges Support For Troubled Bank.

The Chairman of the Central Bank of Afghanistan, Abdul-Qadir Fitrat, on Sept. 6 promised to lend the embattled Kabul Bank "as much as it wants" to stave off a collapse, even as he continued to insist the bank was solvent. He said Kabul Bank, the largest in the country, was meeting the demands of customers "with its own resources", though he conceded he did not know how much money had been withdrawn from the private bank over the past few days.

The frenzied rush of customers trying to empty their savings accounts at its largest branch on Sept. 6 tapered off slightly, though security remained tight. Kabul Bank had suffered huge losses after lending money to President Karzai's allies and pouring millions of dollars into risky real estate investments in Dubai. The president, now more vocal in vowing to fight corruption, is reluctant to arrest the bank's top share-holders who include one of his brothers and other close allies, or to seize their overseas properties bought with borrowed money belonging to "some of the poorest people in the world", as one economist described the roughly $300m in losses from the bank.

Karzai is more likely to use reserve funds to bail out Kabul Bank. On Sept. 6, the Central Bank said "if necessary, it is ready to loan Kabul Bank as much as it wants". For Karzai, while a bail-out could be hailed as the government's attempt to guarantee the people's money, it would do little to deter the kinds of abuses which led to the crisis and would probably increase tensions with its Western partners, who would be indirectly financing the intervention. If such a move takes place, the money will most likely come from Kabul reserve funds in the US, earmarked only for a currency crisis.

Any US intervention could be seen as politically dangerous for Obama, who has distanced himself from Karzai. The US has denied it would provide any financial support in the crisis, but even reserve funds have roots in donor money. Almost all funds belonging to Kabul are donor money. An un-named economist was on Sept. 7 quoted as saying: "Karzai doesn't know what to do. Will he have courage to put them in jail and pay the people? And if not, shareholders will continue living in luxury villas in Dubai, and that's suicide for him". Karzai's best hope is that the bank will weather the storm itself.

On Sept. 6, Fitrat said the situation at Kabul Bank was "almost normal" and that no customers had left without money, since the bank had a healthy liquidity of 40%. He said the bank had received more than $38m in deposits since the crisis began and that the figure was increasing daily. But analysts said those were mostly corporate deposits. When asked about the amount withdrawn by nervous depositors since the crisis, Fitrat said he did not know the figure, but that it was "more than usual".

The Central Bank on Sept. 5 froze properties in Kabul owned by major Kabul Bank shareholders, including ex-chairman Sherkhan Farnood and ex-CEO Khalilullah Frozi, who were dismissed the previous week as news of the bank's losses broke. Those properties are rather insignificant compared with the luxury villas in Dubai, where shareholders hold far more lucrative investments directly linked to the losses from Kabul Bank. The list of frozen properties in Kabul did not include any owned by the president's brother Mahmoud, who is the bank's third main shareholder.

Fitrat said the list included only the names of those who had borrowed the money from the bank. For the second day in a row, barbed wire and armed guards belonging to Afghanistan's national intelligence agency were in front of the bank. Inside, the number of visitors was lower than it had been in previous days. Some customers said they were unable to withdraw more than $10,000. Bank officials said the flow of customers at the bank was normal for government employees receiving their salaries before Id al-Fitr, the Islamic holiday on Sept. 10 marking the end of the Ramadan fasting month. Fitrat is one many banking officials accusing Western news media of stoking public distrust in the bank. On Sept. 6 he encouraged the Afghan media not to translate the "false news" of Western media outlets, but he did not specify criticisms of the foreign press. Mahmoud Karzai urged calm and appealed to the US to head off an economic collapse. But he is part of a very corrupt elite (see below)

In February, the Washington Post ran a series of articles alleging deep-rooted corruption within Kabul Bank. Kabul Bank bought over $150m worth of luxury villas in Dubai and other properties for well-connected members of Karzai's government. There were reports of crippling feuds among the bank's major shareholders. On Aug. 31, the Central Bank moved to take control of Kabul Bank, demanding that the bank forfeit $160m worth of assets. After the seizures, the two top Kabul Bank officials quit. One of them, Farnood, is a world class poker player.

Kabul Bank houses $1.3bn in deposits from ordinary citizens, and handles payments for teachers, soldiers, and police - the bed-rock of a stable Afghan society. The Post reported: The bank's collapse would probably spread panic throughout the country's fledgling financial sector and wipe out nine years of US effort to establish a sound banking system, seen as essential to the establishment of a functioning economy. This would give a big boost to a mostly unregulated "hawala" system, a network of informal money exchanges which, in addition to serving ordinary customers, provides a secure and opaque channel through for traffickers and terrorists.
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Publication:APS Diplomat News Service
Geographic Code:9AFGH
Date:Sep 13, 2010
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