Under threat of the loss of support from the International Monetary Fund (IMF) and billions of dollars of aid, the Afghan government has agreed to break up Afghanistan's biggest private lender after a multi-million dollar fraud scandal.
Diplomats in Kabul said government approval for placing Kabulbank into receivership would be given later on Monday and the process would be complete within two weeks, clearing the way for the IMF to renew its support programme under which billions of dollars of foreign aid are mandated.
All existing shareholders' rights will be extinguished and a special court set up by President Hamid Karzai to determine complaints from last year's troubled parliamentary election would conduct fraud prosecutions, one diplomat said.
Karzai's government and the IMF have been at loggerheads since last September, when news emerged of the scandal at the politically well-connected Kabulbank that has put at risk at least $579 million dollars through fraud, bad loans and mismanagement.
The IMF last month delivered a withering assessment of the Afghan government's handling of the Kabulbank crisis, a review that raised the possibility of the IMF not renewing support.
The IMF wanted the bank placed into receivership immediately to stem losses, while the Afghan government wanted to keep the bank trading and rehabilitate it before a sale in two or three years.
An IMF representative briefed diplomats in the capital, Kabul, late on Sunday. One Western diplomat based in Kabul said negotiations would be concluded during the annual World Bank conference in Washington from April 11-18.
"The renewal of IMF support is one of the conditions that will allow the alignment of our programmes with Afghan needs," the Western diplomat, speaking on condition of anonymity, said.
"It's very encouraging that the government and president Karzai are taking it seriously," he said.
Earlier this month, the British government said it would delay payment of 85 million pounds ($136 million) in aid to Afghanistan because of the continued lack of an IMF support programme, the first warning shot fired by Afghanistan's international aid donors over the banking crisis. [ID:nLDE7282L3]
Britain's Department For International Development said at the time IMF support was used by donors as an indication of sound economic and financial management.
The delayed British aid was to have been paid into the Afghanistan Reconstruction Trust Fund (ARTF), the main vehicle for donor funding.
"BAD ASSETS"
The bank would not be closed, the Western diplomat said, despite some media reports suggesting it would.
"The bank will not be closed," he said. "The good assets will be transferred into a new bank. The bad assets will be put into a 'bad account' and the asset recovery programme will begin."
Much of the missing money was paid out in loans to buy luxury villas in Dubai, where the property markets has since slumped.
The Western diplomat said the central bank had already pumped in $200 million since it took control of Kabulbank last September and the Ministry of Finance would offer a government bond to help cover losses.
Central bank Governor Abdul Qadir Fitrat could not be reached for comment.
The central bank has said the bank is now stable and has argued that putting it into receivership might cause a run on it and other banks, as happened to Kabulbank last year.
Karzai's government has long been plagued by accusations of endemic corruption, and the Kabulbank scandal added a banking crisis to Afghanistan's troubles, which include a growing Taliban-led insurgency and political paralysis. [ID:nSGE71D06A]
Western officials were especially angry about the Kabulbank crisis because its main customers are thousands of small investors in one of the poorest countries in the world.
It also handles salaries for about 300,000 civil servants and the Afghan security forces, which amount to about $100 million a month. U.S. And NATO forces are busily training Afghan forces to take security responsibility so foreign troops can leave by 2014.
Among three senior Kabulbank executives and shareholders who are under investigation is Mohammad Haseen, the brother of First Vice President Mohammad Qasim Fahim.
Another major shareholder whose rights will be extinguished is Karzai's brother Mahmoud Karzai, who owns about 7 percent of the bank but is not under investigation in Afghanistan.
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