The Kabulbank Scandal: Part II

The Kabulbank scam in Afghanistan may be the largest theft of depositor money per capita the world has ever experienced. This is the second of a three-part series chronicling the unfolding and ultimate resolution of that scandal. 

See Part One 

Kabulbank, intervened in September 2010, was finally put into receivership on April 20, 2011. New Kabul Bank (NKB) was established the same day by transferring to it the good assets of Kabulbank and by assuming its remaining deposit liabilities – what is known as a good bank-bad bank split.

This allows for a smooth continuation of the banking services provided by the old bank while the old bank is liquidated.

The conservatorship team that took charge of Kabulbank in September 2010 consisted largely of central bank staff seconded to Kabulbank headed by Masood Khan Musa Ghazi, the highly respected chief accountant at the central bank. Ghazi was made CEO of New Kabul Bank taking his conservatorship team with him.

While highly motivated and intelligent, the team naturally lacked experience with running a commercial bank.

Bankruptcy receivership experience was also in short supply in Afghanistan, but some experience had been gained liquidating a small bankrupt Russian-owned bank the year before. An energetic local team was appointed to represent creditors in the liquidation of Kabulbank in receivership (KBR). But Kabulbank was a bank unlike anything anyone had ever seen before.

Kat Woolford, an IMF consultant with years of American bank liquidation and supervision experience, gave invaluable assistance to both the KBR and NKB. I had worked with her earlier in Iraq.

Each morning one of our armored cars would take her from the IMF guesthouse to either the KBR or NKB and in the afternoon she would switch. The rest of us would generally head to the central bank or the finance ministry, but we would occasionally meet with the staff at KBR, NKB, the Justice Ministry or the Financial Disputes Resolution Committee (FDRC) headed by the highly respected Abdullah Dowrani. The KBR was supervised by the FDRC.

Our guesthouse street, which also included the World Bank offices and the Canadian Embassy, had seven security checkpoints in our block. When returning to the guesthouse the final checkpoint included mirror checks under our van and a once-around by a dog sniffing for explosives.

We flashed our passports to the familiar guards, Kat would slip the dog a treat, and we were off to the fortified entrance of our compound. We stopped grumbling about these checks after a suicide bomber attack on the convenience store at the end of the block.

From deposits of $1.3 billion dollars equivalent eight months earlier, Kabulbank’s deposits had dropped to less than $0.6 billion by the time of its good bank-bad bank split (see Part I of this series). This deposit outflow and NKB’s remaining deposit liabilities were largely financed by two lender of last resort (LLR) loans from Da Afghanistan Bank (DAB), Afghanistan’s central bank.

For all practical purposes Kabulbank had no good assets to transfer to NKB other than the proceeds of the two LLR loans, which became assets of NKB and claims on the old Kabulbank in bankruptcy. Even its extensive branch network was housed in rented offices.

The IMF’s Kabulbank-related conditions for a new lending program were to sell the temporarily state-owned new bank to reputable new owners, recover all of the stolen assets possible and prosecute the wrongdoers. This seemingly simple resolution suffered from innumerable, complex challenges. Every aspect of the resolution was complicated by President Hamid Karzai’s determination to protect his name and the interests of his family and friends.

Privatization/liquidation of NKB

Simply liquidating the bank by selling off its good assets (an extensive branch network, large number of depositors, modern IT infrastructure), which was initially our first choice, was not possible because no other bank was able to take over the essential government payroll function it performed.

The government was well advanced in computerizing its personal records and replacing cash salary payments with direct deposits to employee bank accounts. This was saving the government a lot of money by eliminating ghost workers and paymaster skimming.

Given the lack of payment systems development, it was not possible to allow individual employees to open an account with any bank of their choice at which to receive an electronic salary deposit. All employees of a ministry had to have accounts with the same bank with the capacity to accept such payments.

To a very large extent Kabulbank was the only bank with this capacity and World Bank funded projects to modernize payment systems that would overcome this limitation were years from implementation (now targeted for late 2015). This made it almost impossible to force depositors and/or individual branch offices of Kabulbank into other banks.

Normally a good bank-bad bank split is made by moving clearly identified assets to the new, good bank, which then assumes the remaining deposit liabilities, a so-called purchase and assumption transaction. The books of Kabulbank were so complicated, because of attempts to hide the true state of affairs, that it was not possible to quickly identify good assets and proper liabilities.

Most of the transaction records were maintained in Dubai. As a result, NKB was established by moving almost the entire book to the new bank and clawing back bad assets and fraudulent liabilities to the old bank in bankruptcy as they were identified. This process was greatly assisted by a forensic audit by Kroll International. However this audit that gave NBK a clean and definitive balance sheet – a prerequisite to privatize the government-owned bank – was only completed two years later in April 2012.

In the interim, NKB was forbidden to make new loans and focused on providing payment services such as government salary payments. Though Ghazi, the CEO of NKB, was under the mandate to cut costs, close unprofitable branches and reduce employment, counter-political pressures kept staffing at much higher levels per branch or per deposit than at competitor banks. NKB ran an operating loss of $1 million to $2 million a month.

The IMF insisted that the bank be privatized or liquidated. Afghanistan already had two bloated state banks it needed to get rid of. But politicians were reluctant to give up these cash cows for their families and friends. In a questionable decision, the Ministry of Finance decided to postpone the further staff and branch trimming, leaving it for the new private owners to undertake.

Selling a bank in a place like Afghanistan is no easy task. We preferred foreign buyers and some powerful Afghans preferred local buyers. There were rumors that Kabulbank’s founders would try to buy it back through proxies.

Considerable effort was made by the Finance Ministry, with the help of foreign privatization advisors, to prepare NKB for sale and to organize a transparent bidding process with clear terms and qualifications for bidders.

While several potential bidders expressed interest by the Nov. 27, 2012, deadline, only one actually bid by the mid-January 2013 deadline. This bid from an Afghan with earlier connections with the Kabulbank founder was rejected.

After the IMF rejected suggestions that the government permanently retain ownership of NKB, a second offering with somewhat more flexible terms was undertaken in May 2013 with bidder due diligence access to NKB books from June to August and a bid deadline at the end of August.

Of the three bids received, two of which were potentially acceptable, the bid evaluation committee selected one to recommend to the President’s Cabinet in December. Before we were able to pop the cork on the Champagne bottle to celebrate the successful conclusion of an important and long battle, which promised to significantly strengthen Afghanistan’s banking sector going forward, the Cabinet rejected the bid as inadequate. Those wanting to keep NKB as a state-owned bank had won.

Village craftsmen

DAB capital

When President Karzai announced the government’s guarantee of all legitimate deposits with Kabulbank, then Governor Abdul Qadeer Fitrat and Finance Minister Omar Zakhilwal jointly signed an agreement for a lender of last resort loan to Kabulbank sufficient to cover any deposit withdrawals (US$ 400 million). The minister’s approval was required by the “exceptional circumstances” provision of the central bank law.

When Kabulbank was put into receivership (KBR) its remaining deposits were transferred to a new bridge bank, New Kabul Bank, along with sufficient good assets, including the proceeds of a second LLR loan from DAB of US$425 million, to cover its deposit liabilities and expected operating losses – i.e. a good bank-bad bank split.

The MOF later replaced DAB’s LLR loans to Kabulbank totaling an equivalent of US$825 million with an eight-year promissory note paid off in equal quarterly installments. This required annual appropriations by parliament and took DAB’s place among the creditors of the bankrupt bank. Thus any asset recoveries from KBR’s liquidation would go to the Ministry of Finance as the only remaining creditor of significance.

The entire Kabulbank affair raised concerns in the ministry about DAB’s financial condition and its operations. It also revealed some issues with regard to the calculation of DAB’s capital. At the time of the Kabulbank crisis, before it issued its LLR loans to Kabulbank, DAB had a strong positive equity position (assets exceeded liabilities) but negative capital as determined by its accounting principles.

The MOF wanted to know why it wasn’t receiving the net profit of DAB it thought it was entitled to and DAB wanted to know why the MOF wasn’t recapitalizing it as required by the law. My IMF colleague, Marcin Sasin, and I convened several meetings between the MOF and DAB and were eventually able to achieve agreement between the two on amendments to the capital provisions of the DAB law and what was owed between the two.

The policy goal of most central banks, which we thought appropriate in this case as well, is to account for net income in accordance with International Financial Reporting Standards (IFRS) but to exclude unrealized valuation gains from any resulting distributions of profits to the government.

Most central bank assets are foreign, and changes in the exchange rate between the domestic currency and the currency of its foreign assets change the domestic value of those assets.

The income from DAB’s gold assets, which had appreciated in value considerably, was put in a special reserve that protected it from inclusion in capital and profits payable to the government. But DAB had incurred losses on the revaluation (realized and unrealized) of its foreign currency assets that were not netted against its gains from gold. Thus gold’s appreciated value was reflected in DAB’s equity but not as part of net income added to capital.

The proposed amendments worked their way through the approval process (DAB’s board, the Department of Justice, Cabinet) and still sit awaiting action in the parliament two years later.

Asset recovery

Efforts to recover Kabulbank assets “lent” to its owners and their friends were complicated by President Karzai’s desire to minimize publicity and protect his family and friends, as well as the authorities’ lack of experience with the established protocols for international cooperation in asset recovery.

Based on the Kroll audit and subsequent discoveries by the Kabulbank receiver (KBR), the receivership had US$1,011 million in potentially recoverable assets of which US$896 million where claims on shareholders and related parties. Of this amount as of Aug. 1, 2013, US$151 million had been recovered in cash and an estimated US$179 million in non-cash assets available for sale.

The receiverships claims on the 17 shareholders and their friends were very difficult to document as many of them were held through intermediate companies such as Gas Group, Pamir Airways, Kabul Neft Co, etc. Only $52 million of Kabulbank’s loans were what we called normal: legally contracted with repayment schedules.

Initially, Governor Fitrat sought voluntary repayments, then legally binding agreements for repayment from the shareholder group. But the group contested half of the $896 million in claims made against it.

Under IMF pressure to increase asset recovery, President Karzai issued decrees excepting all but the two founders from accrued interest and prosecution if their debts were repaid in full (within one month of the first decree issued April 11, 2011, and again within two months of the second decree issued April 4, 2012).

This was reported to the public, under IMF pressure for greater transparency, in the “Report on Kabul Bank Asset Recovery”

Although the asset recovery process recovered cash, seized and sold, and normal loans were repaid, total recoveries amount to only about $200 million out of US$935 million identified assets.

Mahmood Karzai, the president’s brother and a holder of 7.41 percent of Kabulbank’s shares, repaid $3.9 million of what he had “borrowed” claiming that he did not need to repay the remaining balance of $8.8 million because that had been lent to him to buy his shares (a violation of banking regulations) and his shares were now worthless.

Thus he had complied with his brother’s conditions for amnesty both in his view and in his brother’s view.

The seizure of assets belonging to Kabulbank founder Sherkhan Farnood and ex-CEO Khalilullah Ferozi abroad was very limited because Afghan officials were not familiar with the required international protocols and because the two were never convicted of money laundering, a prerequisite for many of the international asset-recovery tools, largely because the attorney general did not wish to press charges.

Western influence in downtown Kabul.


President Karzai managed to keep the public in the dark about what had happened until Governor Fitrat lost patience and disclosed the names of shareholders who had received loans in testimony to parliament on April 27, 2011.

He soon thereafter resigned and fled the country and now lives in the United States where he had also lived during the Taliban reign from September 1996 until December 2001. During Governor Fitrat’s first stay in the U.S. he sold Afghan carpets. He helped me buy (i.e. bargain for) one of the several Afghan carpets in my home during my first visit to Kabul in January 2002.

One of the IMF conditions for lending to Afghanistan was an independent and public investigation and report on the Kabulbank fraud. This was fulfilled by the Independent Joint Anti-Corruption Monitoring And Evaluation Committee. In its Report Of The Public Inquiry Into The Kabul Bank Crisis, issued November 15, 2012, the committee found that:

  • “Kabul Bank’s controlling shareholders, key supervisors and managers led a sophisticated operation of fraudulent lending and embezzlement predominantly through a loan-book scheme…. The loan-book scheme provided funds through proxy borrowers without repayment; fabricated company documents and financial statements; and used information technology systems that allowed Kabul Bank to maintain one set of financial records to satisfy regulators, and another to keep track of the real distribution of bank funds. Shareholders, related individuals and companies, and politically exposed people were the ultimate beneficiaries of this arrangement. Over 92 percent of Kabul Bank’s loan-book was for the benefit of 19 related parties (companies and individuals). Except for the initial investment of $5 million, all shareholder acquisitions and transfers were ultimately funded by money from Kabul Bank.
  • “Kabul Bank’s Credit Department opened loan accounts for proxy borrowers on instruction from senior management, and forged supporting documents including applications, financial statements, and registrations, and employed fake business stamps to lend authenticity to the documents. Many financial statements were forged by Afghan accounting firms, seemingly established for the sole purpose of producing fraudulent documents to support loan files….
  • “Electronic transfers had the appearance of being transferred to overseas suppliers or for other legitimate purposes. Some cash was transferred through the Kabul Airport using Pamir Airways, which was owned by shareholders related to Kabul Bank. Repayment of loans was rare, and most often new loans were created to provide the appearance of repayment.” (IMEC report)

The normal Afghan courts had no understanding of and thus competence to evaluate the financial crimes at issue and are notoriously corrupt. A Special Tribunal established by President Karzai to hear Kabulbank-related cases convicted the two main architects of the fraud of a range of charges (but not money laundering). Nine DAB staff and management, including former governor Fitrat, were also convicted of failing to detect or prevent the fraud.

These convictions have been appealed. No further progress was made during the remainder of Karzai’s presidency.

The conclusion of the story (maybe) will be presented in the next issue.  



The village of Istalif in North Western Afghanistan.
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Warren Coats
Warren Coats retired from the International Monetary Fund in 2003 where he led technical assistance missions to more than twenty countries (including Afghanistan, Bosnia, Egypt, Iraq, Kenya, Serbia, Turkey, and Zimbabwe). He was a member of the Board of the Cayman Islands Monetary Authority from 2003-10. He is currently Visiting Scholar in the Institute for Capacity Development Department of the International Monetary Fund (February 20, 2018 through April 30, 2019) and a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise. He has a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. In March 2019 Central Banking Journal awarded him for his “Outstanding Contribution for Capacity Building.” Warren CoatsT.  +1 (301) 365 0647E. [email protected]W: