Kabul Bank

Kabul Bank

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Kabul Bank is a commercial bank in Afghanistan
Afghanistan
Afghanistan , officially the Islamic Republic of Afghanistan, is a landlocked country located in the centre of Asia, forming South Asia, Central Asia and the Middle East. With a population of about 29 million, it has an area of , making it the 42nd most populous and 41st largest nation in the world...

, with its main branch in the capital of Kabul
Kabul
Kabul , spelt Caubul in some classic literatures, is the capital and largest city of Afghanistan. It is also the capital of the Kabul Province, located in the eastern section of Afghanistan...

. Established in 2004, it is the main bank used to pay the salaries of the army
Military of Afghanistan
The military of Afghanistan is composed of the Afghan National Army and the Afghan National Army Air Force . Being a landlocked country, Afghanistan has no navy, and the private security forces who are sometimes seen wearing military uniforms are not part of Afghanistan's military...

 and security forces
Afghan National Police
The Afghan National Police - ANP - is the primary national police force in Afghanistan. It serves as a single law enforcement agency all across the country. The Afghan police force was first created with the establishment of the Afghan nation in the early 18th century...

. The bank provides facilities to maintain accounts in Current, Savings Bank and Fixed Deposits; and offers its consumers branch and ATM
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...

 services. The bank is under the supervision of Da Afghanistan Bank
Da Afghanistan Bank
The Afghanistan Bank is the central bank of Afghanistan. It regulates all the banking and money handling operations in Afghanistan.Da Afghanistan Bank is one of the leading & government recognized bank of Afghanistan which was established on 1939....

 (DAB), which is the central bank of Afghanistan.

The bank was involved in a major financial scandal in 2010, when its Chairman Sherkhan Farnood
Sherkhan Farnood
Sherkhan Farnood was the Chairman of Kabul Bank until late 2010, which is Afghanistan's largest private financial institution with over 1 million customers. Farnood holds 28.16% of the shares in the Kabul Bank. He also owns Pamir Airways, in partnership with Khalilullah Fruzi/Frozi, Mohammed Fahim...

 and other insiders were spending the bank's $1 billion for their own personal lavish style living as well as lending money under the table to family, relatives and friends. In September 2010, one of the principal owners of the bank, said that depositors had withdrawn $180 million in two days and predicted a "revolution" in the country's financial system unless the Afghan government and the United States moved quickly to help stabilize the bank. In November 2010, reports appeared that Farnood and chief executive Khalilullah Frozi both had been sacked from duties; as of early 2011 both were effectively under house arrest
House arrest
In justice and law, house arrest is a measure by which a person is confined by the authorities to his or her residence. Travel is usually restricted, if allowed at all...

 and could not leave the country, and in July
July
July is the seventh month of the year in the Julian and Gregorian Calendars and one of seven months with the length of 31 days. It is, on average, the warmest month in most of the Northern hemisphere and the coldest month in much of the Southern hemisphere...

 2011 both were formally arrested and detained in Kabul. DAB stated in February 2011, it would seek to sell Kabul Bank within three years once it was rehabilitated, but both the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 and US officials subsequently pressed for a rapid winddown of the institution. A recent USAID inspector general report estimated that fraudulent loans diverted $850 million to bank insiders. As of October 2011, more than a year after the government seized control, officials have recovered less than 10 percent of the nearly $1 billion that went missing.

Background and significance



Since 2004, Kabul Bank has increased its branch network to 143 branches covering 19 provinces. The bank has 44 branches in Kabul, with the remaining 99 branches located in 18 other provinces.

Accounts can be opened and maintained in Afghani
Afghan afghani
The Afghani is the currency of Afghanistan. It is notionally subdivided into 100 pul , although there are no pul coins in circulation.-Original Afghani :...

, USD and EUR
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...

. Kabul Bank is connected throughout the globe with SWIFT
Swift
The swifts are a family, Apodidae, of highly aerial birds. They are superficially similar to swallows, but are actually not closely related to passerine species at all; swifts are in the separate order Apodiformes, which they share with hummingbirds...

 facility, which enables fund transfer for its customers. The bank has correspondent relationship with seven international banks situated in Germany, China, Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...

, Tajikistan
Tajikistan
Tajikistan , officially the Republic of Tajikistan , is a mountainous landlocked country in Central Asia. Afghanistan borders it to the south, Uzbekistan to the west, Kyrgyzstan to the north, and China to the east....

, Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...

 and India. It is also the principal agent for Western Union
Western Union
The Western Union Company is a financial services and communications company based in the United States. Its North American headquarters is in Englewood, Colorado. Up until 2006, Western Union was the best-known U.S...

 in Afghanistan, and is handling 85% of their total remittances business.

Kabul Bank is significant to Afghanistan's internal security and stability because it is the vehicle used to pay as many as 300,000 Afghan government employees, mostly military and police, who are key to plans to rebuild Afghanistan's capacity to deal with its ongoing Taliban-led insurgency:
  • On December 27, 2010, a suicide car bomber killed at least three Afghans, including one policeman, as he targeted police officers who lined up to withdraw their salaries in front of Kabul Bank in central Kandahar
    Kandahar
    Kandahar is the second largest city in Afghanistan, with a population of about 512,200 as of 2011. It is the capital of Kandahar Province, located in the south of the country at about 1,005 m above sea level...

    ; the midday explosion also wounded 16 policemen and five civilians, officials said.
  • On February 19, 2011, at least 38 people (including 13 policemen) were killed during an insurgent raid on a branch of Kabul Bank in Jalalabad
    Jalalabad
    Jalalabad , formerly called Adinapour, as documented by the 7th century Hsüan-tsang, is a city in eastern Afghanistan. Located at the junction of the Kabul River and Kunar River near the Laghman valley, Jalalabad is the capital of Nangarhar province. It is linked by approximately of highway with...

    , the provincial capital of Nangarhar, and at least three militants were killed, officials said. Three suicide bombers reportedly entered the bank and detonated themselves, and fighting between insurgents and security forces continued for over four hours; both President Hamid Karzai
    Hamid Karzai
    Hamid Karzai, GCMG is the 12th and current President of Afghanistan, taking office on 7 December 2004. He became a dominant political figure after the removal of the Taliban regime in late 2001...

     and a NATO ISAF
    ISAF
    ISAF may refer to:* International Sailing Federation, the world governing body for Olympic and other competitive sailing.* International Security Assistance Force, the NATO-led security mission operating in Afghanistan since 2001....

     spokesman condemned the attack, which was the deadliest in the country since June 2010.

2010 panic and aftermath


In early 2010, the Washington Post reported that the Kabul Bank, with its ties to the Karzai family and questionable practices, played a part in "a crony capitalism that enriches politically connected insiders and dismays the Afghan populace."

At the beginning of September, 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, Kabul Bank would almost certainly collapse, undermining confidence in the nascent financial system the Afghans have been trying to build with American help.

"If this goes on, we won’t survive", Mr. Frozi said in an interview. "If people lose trust in the banks, there will be a revolution in the financial system."

Mahmood Karzai
Mahmood Karzai
Mahmood Karzai is a businessman and brother of Hamid Karzai, the current president of Afghanistan.He was previously a restauranteur in San Francisco, Boston and Baltimore....

 is the brother of the Afghan President Hamid Karzai
Hamid Karzai
Hamid Karzai, GCMG is the 12th and current President of Afghanistan, taking office on 7 December 2004. He became a dominant political figure after the removal of the Taliban regime in late 2001...

 and a seven percent shareholder in the bank. In a telephone interview with the Boston Globe he said: "America should do something." In October, the Washington Post reported that Mahmood Karzai could soon be indicted for tax evasion in the US, though he denied the charges, telling the newspaper: "I'm very clean", and insisting his only interest was "rebuilding Afghanistan."

Afghan leaders promised to guarantee deposits in an attempt to arrest the panic, which began at the end of August when the country's top banking officials demanded the resignations of both Frozi and Farnood. "The government has decided that there will be an audit firm that will be coming to audit not only Kabul Bank accounts but also other private banks in Afghanistan", an Afghan presidential spokesman announced in late October. Earlier in the month, the government also froze assets held by some of Kabul Bank's owners even as the central bank governor said it was solvent and had the backing of Karzai's US-funded administration. US-educated economist Hamidullah Farooqi, a former Karzai minister and Chairman of the Afghanistan International Chamber of Commerce, said Afghanistan received a "massive wake-up call" from the crisis, further stating: "It's not just a lack of capacity in our institutions, there is a lack of laws and a lack of accountability, which is much more serious. It's a case of the blind leading the blind. They are too young, they are babies."

In mid-January 2011, acting chief financial officer Rana Tayyab Tahir and other Pakistani
Pakistan
Pakistan , officially the Islamic Republic of Pakistan is a sovereign state in South Asia. It has a coastline along the Arabian Sea and the Gulf of Oman in the south and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. In the north, Tajikistan...

 employees of Kabul Bank fled to Pakistan, apparently out of fear for their lives and possible arrest, though some said they were being made scapegoats for powerful shareholders. Afghan authorities also called in several bank managers, including foreigners, for questioning and detained some in southern Afghanistan's Helmand Province
Helmand Province
Helmand is one of the 34 provinces of Afghanistan. It is in the southwest of the country. Its capital is Lashkar Gah. The Helmand River flows through the mainly desert region, providing water for irrigation....

 in connection with illicit transfers of bank funds.

In early February 2011, DAB Governor Abdul Qadir Fitrat said the central bank would impose stricter rules on banks wanting to handle about $1.5 billion worth of salaries for government and security officials, which until now has been done by Kabul Bank. Fitrat also told Reuters the total amount of money at risk over suspected irregularities at Kabul Bank amounted to $579 million, almost twice the figure estimated when the bank's troubles first surfaced. Fitrat brushed off concerns that it faced liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...

, saying it would be privately owned again within three years. "Kabulbank is stabilised, it has enough cash at its disposal and the central bank is trying to rehabilitate the bank and then at some point sell it to potential buyers in two or three years," Fitrat told Reuters. In early July
July
July is the seventh month of the year in the Julian and Gregorian Calendars and one of seven months with the length of 31 days. It is, on average, the warmest month in most of the Northern hemisphere and the coldest month in much of the Southern hemisphere...

 2011, Fitrat resigned as head of the central bank after fleeing to the United States, claiming his life had been threatened and that he was being made a scapegoat for politically connected individuals.

After a mid-February 2011 visit by Neal Wolin, the US deputy Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...

 secretary, the Afghan finance ministry said that weak international support had exacerbated the crisis. “Afghan and US officials agreed that (the crisis) ... was compounded by the erroneous audit by PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....

, and ineffective international technical assistance and supervision,” the ministry said. However, Wolin pressed the government to rapidly place the lender into receivership
Receivership
In law, receivership is the situation in which an institution or enterprise is being held by a receiver, a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights." The receivership remedy is an equitable remedy that emerged in...

, echoing calls made by a previous International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 (IMF) delegation. “The deputy secretary ... stressed the need for the Afghan government to take swift and decisive action to ensure a credible, effective resolution of issues related to Kabul Bank," the US embassy said in statement. Kabul Bank was put into receivership following the scandal and a new bank set up, but only $70 million of fraudulent loans it granted have so far been recovered, with criminal investigations ongoing. In October 2011, Afghanistan's parliament approved a $51 million payment to DAB as part of a planned compensation package over its multi-million-dollar bailout; the payment is part of a package of government measures agreed with the IMF to secure a new loan. Afghanistan has been without an IMF program since the Kabul Bank failure, but the IMF announced that it is moving ahead on a new $129 million loan in the wake of the government's reform promises, with a new program expected to be submitted to the IMF executive board for approval in November
November
November is the 11th month of the year in the Julian and Gregorian Calendars and one of four months with the length of 30 days. November was the ninth month of the ancient Roman calendar...

 2011.
At the end of June
June
June is the sixth month of the year in the Julian and Gregorian calendars and one of the four months with a length of 30 days. Ovid provides two etymologies for June's name in his poem concerning the months entitled the Fasti...

 2011, the Washington Post reported that Farnood and Frozi used fake names, forged documents, fictitious companies and secret records as part of an elaborate ruse to funnel hundreds of millions of dollars to shareholders and top Afghan officials, including President Karzai's brother Mahmood and Mohammed Fahim
Mohammed Fahim
Mohammad Qasim Fahim is an Afghan military commander, politician and the First Vice President since November 2009. He was the Defense Minister of the Afghan Transitional Administration, beginning in 2002 and also served as Vice President from June 2002 to December 2004...

, the country's first vice president. Both Farnood and Frozi were arrested in Kabul and held without charge, even though Afghanistan's attorney general said the evidence against them was "quite clear." Without a successful resolution of Kabul Bank’s problems, one senior U.S. official said Afghanistan could face "the collapse of the banking sector." As of October 2011, neither man had yet been charged with a crime, but Deputy Attorney General Enayatullah Nazari said the government intends to bring them to court.
“A crime has happened,” Nazari said. “They will go to the court whether they manage to secure the money or not.” Authorities loosened the terms of their detention and provided them with a security detail to go to a bank office on workdays and on occasion to fancy restaurants and hotels for what Nazari described as work meetings.

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