Kabul Bank braces for run on deposits following questions about its financial health

By Rahim Faiez, AP
Wednesday, September 1, 2010

Kabul Bank braces for run on deposits after doubts

KABUL, Afghanistan — Managers of Afghanistan’s largest bank braced for a run on deposits Thursday, a day after nervous customers showed up in droves to take out their money following the resignation of two top executives allegations of mismanagement and unorthodox lending practices.

Crowds outside Kabul Bank’s main branch in the center of the Afghan capital were larger than normal ahead of opening, although there seemed to be little panic.

Afghan officials have sought to reassure the public, and Afghan television stations broadcast remarks Wednesday night from central bank governor Abdul Qadir Fitrat insisting that Kabul Bank was solvent and had enough liquidity to meet demands.

Problems at the bank could have wide-ranging political repercussions since it handles the pay for Afghan teachers, soldiers and police in this unstable, impoverished nation beset by the stubborn Taliban insurgency and widespread drug trafficking and plundering of aid money.

The bank’s woes also tie into the web of corruption and personal connections that has soured many Afghans on their government: President Hamid Karzai’s brother, Mahmood Karzai, is the bank’s third largest shareholder with 7 percent.

The New York Times and The Wall Street Journal reported Wednesday that Kabul Bank’s losses could exceed $300 million — and that the figure is more than the bank’s assets. The Washington Post reported that the central bank had ordered the newly resigned chairman to hand over $160 million in real estate holdings in Dubai purchased for relatives and friends of the political elite.

At his news conference Wednesday, Fitrat refused to address the allegations and tried to dissuade customers from withdrawing their money. He said the top two executives of Kabul Bank had resigned as part of reforms being implemented by the central bank to improve professionalism at some of Afghanistan’s 10 private banks.

“The central bank will stand fully behind Kabul Bank. Failure of Kabul Bank is not an option,” Fitrat said to shore up confidence in the bank. “I hope that the situation will be stabilized by tomorrow or the day after.”

While the Afghan government has no formal system to insure bank deposits, Fitrat said the central bank has funds to help the bank stay solvent.

Customer Masuda Sultan of Kabul said that when she arrived at the bank about 9:30 a.m. a crowd had already formed around the “VIP” area where customers go if they want to withdraw $10,000 or more. At first, bank employees told her they could not complete her transaction.

“They said they had to get it out of the central bank,” said Sultan, who was then steered to an upstairs office where bank employees tried to convince her to keep her money in the institution.

“They said ‘We don’t have it right now,’” said Sultan, who was told to return in the afternoon when the bank honored her withdrawal.

Mohammed Azimi, a businessman in the northern city of Mazar-i-Sharif, said he tried to withdraw $50,000 or $60,000, but the bank would only let him withdraw $5,000.

“They wouldn’t give me the money,” Azimi said. “They said they would give me the money tomorrow.”

Sherkhan Farnood, former chairman of Kabul Bank, and Khalilullah Ferozi, former chief executive officer, voluntarily resigned because, under new reforms, only banking professionals can hold the top operating positions at banks, Fitrat said. He said the bank is being run by Masood Ghazi, a former official at the central bank. Fitrat said top executives at other banks will be resigning, too, to conform with the reforms.

Farnood, a world class poker player, and Ferozi each own 28 percent of the bank’s shares.

Two months ago, the central bank told Afghan banks that it was going to start requiring banking professionals to hold top management positions.

“Kabul Bank initiated this change for itself,” Fitrat said. “The central bank has not taken over Kabul Bank, and it was purely a Kabul Bank decision, which was approved by the central bank. Of course, we welcome this decision. This is a positive move.”

Fitrat would not confirm whether the central bank was probing the bank’s lending practices.

“We will always investigate any irregularities in any bank whenever we receive reports,” he said.

Baryalay Khan, a car dealer in north Kabul, said Wednesday that he learned about the bank’s problems at midday, but couldn’t get to the bank before it closed.

“I am very concerned because I have $30,000 to $40,000 in the Kabul Bank,” Khan said. “I’m not sure this bank is trustworthy. “My plan is to go to the bank tomorrow and move my money to another bank. It’s still very confusing.”

Kandi Shah, a carpet dealer in Kabul, said he was at a funeral when he heard about the bank and couldn’t leave to make a withdrawal.

“Everybody was so trusting of this bank, but suddenly they have lost $300 million?” said Shah, who also said he planned to go to the bank on Thursday and empty all 85,000 euros ($108,870) from his account and deposit it in another bank. “Kabul’s security is not good enough to keep it at the house.”

Asif Khan, manager of a hotel in the southern city of Kandahar, got a heads-up about the bank’s problems on Tuesday. A relative who works at Kabul Bank advised him to withdraw his money that day because it might not be possible to gain access to it after that.

Khan said he tried to withdraw about $900 on Tuesday, but the cashier only allowed him to take out about $560.

“They said ‘There are too many withdrawals today and we have a shortage of money,’” said Asif Khan, who on Wednesday withdrew another $290.

However, Habib Raza, a former Kabul Bank employee who runs an electronics shop in Kandahar, said the bank honored his entire $4,482 withdrawal on Wednesday.

“I wish and I pray that the problem can be solved,” said Raza, who left a little money in his account.

The U.S. welcomed the central bank’s decision to “confront the mismanagement of Kabul Bank,” U.S. State Department spokesman P.J. Crowley said Tuesday.

“The individuals suspected of illegitimate activities have been replaced and the Afghan government is taking the necessary steps to strengthen the bank and protect its depositors,” he said.

“The situation presents a unique opportunity for the Afghan government to take a strong stand against corruption. We fully expect President Karzai to back the central bank’s efforts and any law enforcement actions that follow to hold those responsible for illicit activity accountable.”

Maj. Joel Harper, a spokesman for the international military coalition in Kabul, issued a statement, saying: “This is an action we believe is being addressed competently by the governor of the central bank and the president of Afghanistan.”

Associated Press Writers Amir Shah in Kabul and Mirwais Khan in Kandahar contributed to this report.

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