Afghan Elite Borrowed Freely From Kabul Bank

When a brother and nephew of an Afghan vice president wanted to build up their fuel transport business, they took out a $19 million loan from Kabul Bank. When a brother of the president wanted to start a cement factory, he took out a $2.9 million loan; he also took out $7.9 million for a luxury townhouse in Dubai. When the bank’s chief executive officer wanted to invest in newly built apartments in Kabul, he took almost $18 million.

The terms were hard to beat: no collateral, little or no interest. And repayment optional, at least in practice.

Those are just a few of the loans detailed in a damning internal report by Afghanistan’s own Central Bank, which depicts the Afghan political elite as using Kabul Bank, the country’s biggest financial institution, as their own private piggy bank.

The report both raises questions about why the authorities did not act sooner, and suggests the answers lay in the political connections of the bank’s officers and shareholders — the recipients of most of the roughly $900 million in bad loans.

"Transparency and accountability were sacrificed to widespread falsifications in order to cover up the use of influence," the Central Bank’s officials wrote in the Oct. 20, 2010, report, a copy of which was recently obtained by The New York Times.

“It was like a Ponzi scheme,” said a Western diplomat familiar with the bank’s dealings. “The bank had to keep marketing and getting more deposits to fund the loans that they weren’t getting interest on.”

The report also suggests that Kabul Bank’s long-term finances are in far more dire shape than previously understood, which explains why the Central Bank has been discussing putting the bank into receivership. The International Monetary Fund is pressing for receivership as a condition of renewing its program with Afghanistan. Lacking that, some key donors are planning to withhold aid from the country.

Whether the government will approve the dissolution of the bank is not yet clear, but whatever its future, as the Central Bank outlines in its report, there will be high costs for the Afghan government, which will have to make good on the nonperforming loans in order to keep depositors whole.

News reports on Sunday and Monday that the Central Bank had formally decided to dissolve Kabul Bank were denied by officials at the Central Bank and at the Afghan Ministry of Finance Sunday and Monday. "In fact no decisions have been taken yet by the Central Bank and the government of Afghanistan," said Said Ishaq Allawi, an adviser to the governor of the Central Bank. "Technical issues are being discussed right now. No decision has been made on the fate of Kabul Bank."

However, an Afghan banking official did confirm that the Supreme Council of the Central Bank, its governing board, had voted in favor of dissolution of Kabul Bank, putting its assets, deposits and remaining good loans up for sale, and the rest into receivership. However, discussions are continuing within the Central Bank on implementation of that decision, and the Afghan government will have to approve the decision through a body called the Financial Disputes Resolution Commission, said the official, who spoke on condition of anonymity due to bank secrecy rules. Officials at the commission said Monday they had not yet been notified of any move to dissolve Kabul Bank, according to secretary Mahmadullah Firoz.

Mr. Allawi, the Central Bank spokesman, said the bank would have no comment on the Central Bank’s internal report.

The sheer scale of the fraud and the lack of documentation about where exactly the money went appears to have initially stunned Central Bank officials. “All administrative bodies, supervisory bodies and decision-making bodies in the bank” played a role in the fraud, wrote the Central Bank’s internal auditors. So did the shareholders, who knew each other personally and were involved in joint bank-financed ventures. They “engineered extensive violations and used influence” with the bank’s executives, so that they would have a ready source of money, the report said.

With considerable effort and only limited support from the government, the Central Bank has belatedly tried to stem the flood of red ink. Its officials have worked hard to secure loan repayment agreements from the major borrowers and shareholders, but it has not been easy. Not all of them agreed to repayment schedules. Others disputed the full amount of their loans saying they should only have to repay a portion of the money. In some cases the loans were for businesses from which little money could be recouped even if the assets were sold off. For instance, the $98 million poured into Pamir Airways could not be repaid by selling its small fleet of aging airplanes, which are now grounded.

Those borrowers and shareholders who did sign repayment agreements, agreed to long-term installment plans that could take three to seven years to pay off. Some diplomats doubt that the borrowers will make good even on those agreements and say that only an estimated $30 million to $50 million has been repaid so far out of an estimated $700 million to $900-plus million in dubious loans. While some of those loans are being repaid with interest, the vast majority are not, according to the Central Bank report, which lists the bank’s total outstanding loans as $986 million.

The interest the bank was earning on its nonperforming loans was so low that come last September, when depositors briefly made a run on the bank, it was earning "a small amount in comparison with the bank’s fixed costs," the report said, suggesting that depositors’ money would have to cover those costs.

Among the Central Bank’s findings were that Kabul Bank’s management kept two sets of books: a fake set in Kabul and a real set in Dubai at the Shaheen Currency Exchange, which was run by Sherkhan Farnood, the bank’s chairman. The bank never showed the real books to the Central Bank or to outside accountants who audited the bank’s books, the report said.

And even those “real” books did not include all transactions. In some cases loan recipients were concealed by multiple front men and loans were often made in the name of fictional people or fictional companies. Some loans were even given to anonymous or unknown borrowers.

In addition, bank officers handed money out to political campaigns, to artists, a sports team and influential figures, and simply used bank revenues to pay for their own life styles, the report said.

The Central Bank report gives a sense of the scale of the fraud by noting that just from February through August last year, Kabul Bank granted 101 loans without any real loan documents — for a total value of $387.1 million. This was done both to evade banking laws which limit how much money any one borrower can take from the bank, but also to make it look as if the bank had a number of interest-playing loans, when in many cases no interest was being paid at all.

Among the 18 breaches of Afghan banking law and regulations detailed in the Central Bank’s report is that the bank invested directly in businesses other than banking, including an airline, a television station, numerous real estate construction ventures and gas transport. Some of those business then attempted to drive out rivals by slashing prices below the cost of the product, losing millions of dollars. For instance Pamir Airlines cut its ticket prices to Dubai so far below its costs (at one time to $50 a ticket) that no other airline could compete on price. However, it failed to drive out competitors. After a fatal plane crash killing 44 persons, Pamir was unable to compensate the victims and was recently shut down by the Afghan Civil Aviation ministry for its poor safety record.

The largest number of loans, other than those taken by the bank’s chairman, Mr. Farnood, went to first vice-president Marshall Fahim’s brother, Abdul Haseen Fahim. Mr. Fahim had a share in at least three companies that took loans totaling $182 million. While Mr. Fahim’s had only a share in each of the companies that borrowed money, his presence, like that of Mahmoud Karzai’s, helped to curtail scrutiny of the loan’s validity, according to diplomats.

In an interview Mr. Fahim downplayed the significance of his loans and suggested that the bank and Mr. Farnood bore the main responsibility. “The main money is with Sherkhan,” he said. Mr. Fahim said he had paid off “10 percent to 20 percent” of his loan, but did not say whether that referred to one loan, or to the total of all his loans.

He added that the government should not take over the bank. “The government should not own the bank because anything that belongs to government becomes a bureaucracy.”

According to the Central Bank report Mr. Fahim agreed with another shareholder, Khalilullah Fruzi, the bank’s former chief executive, to pay back $24 million he borrowed for Gas Group, one of his energy sector ventures. However, the total amount borrowed by Gas Group was at least $121 million, according to the report, leaving unclear how Kabul Bank will obtain the other $97 million. Mr. Fahim also owes a total of $40 million for a loan to the Zahid Walid Group. He has paid back $4 million and asked for a term-loan for the balance.

His third major loan was $21 million for the Kabul Oil Company, in which he had a partial ownership along with Mohammed Ismail Ghazanfar, the owner of Ghazanfar Bank; Atta Muhammad Noor, a former Northern Alliance commander and now the governor of Balkh Province; and Kamal Nabizada, a business magnate in northern Afghanistan. Mr. Ghazanfar subsequently sold his share to the Kabul Bank chairman, Mr. Farnood.

The report says that auditors doubt that the Kabul Oil Company’s loan could ever be repaid because it “has no operation now in this field and has not left any moveable or immoveable assets (chattels or real estate.)” No one seems to know where the money went.

The governor of Balkh, Mr. Noor, said the business never got off the ground and that while he was a partner he never played any active role. “The business never went forward,” he said. Although the Central Bank report does not mention Mahmoud Karzai, a brother of the president, as a shareholder in the company, Mr. Noor said that Mr. Karzai also had a share.

Mr. Karzai has agreed to pay back only a sliver of what he owes, according to the Central Bank report. According to the Central Bank, he borrowed a total of nearly $18 million (without interest): $5.9 million to buy real estate in Dubai; $7.2 million for his shares in Kabul bank; and $4.7 million for his “personal accounts” and shares in the Afghan Investment Company.

“As soon as the officials of the loan department in Kabul Bank and the Central bank started settlement of the accounts, he denied purchase of the real estate in Dubai and called it the personal property of Sherkhan Farnood,” according to the report.

However, Mr. Karzai did pay back the money he borrowed for his personal use and has agreed to a repayment schedule for his loan for his investment in the cement company.

The International Monetary Fund and a number of Western diplomats believe that the wrongdoers must be held to account in order to restore Afghans’ faith in the banking system, including criminal prosecutions. However, it is unclear that the government is committed to that level of public scrutiny of those close to the presidential palace. Still, the government’s official line is that those who committed the fraud will be prosecuted. “Kabul Bank is a criminal case,” said Rangin Dadfar Spanta, the Afghan National Security adviser, in an interview earlier this month.

“For the interest of the financial system we have to protect the money and property of our people; in the coming days we will have more investigations; this can not be business as usual,” he said.

The International Monetary Fund has suspended its program with Afghanistan because of its dismay at the handling of banking regulation and Kabul Bank in particular, which has delayed the ability of several western donors to funnel money to the Afghan government. One is the British government which has delayed $137 million in funds, and many others are expected to follow suit.

"The Afghans still do not have a solution to the Kabul Bank mess and they just don’t seem to realize how serious it is," a Western diplomat said recently.

I.M.F. officials and donor countries want to see the misappropriated loans repaid out of Afghan government tax revenues -- rather than through the money it gets from donors, who finance the great majority of the country’s operating budget.

Kabul Bank’s biggest depositor has been the Afghan government itself, which pays military and police salaries through the bank; most of those funds are provided directly by the United States.