The tragedy of Kabul Bank

A book by Abdul Qadeer Fitrat, reviewed by Warren Coats

The book The tragedy of Kabul Bank on s ahelf.When Kabul Bank was put into conservatorship in early September 2010, its $1.3 billion dollar balance sheet represented one third of total bank deposits in Afghanistan. By the time it was put into receivership in April 2011, a long delay forced on Da Afghanistan Bank (Afghanistan’s central bank and bank regulator) by President Hamid Karzai, it was clear that most of its deposits, the equivalent of almost one billion U.S. dollars, had been lent to its owners. These loans had been booked to and channeled through hundreds of dummy firms and unsuspecting “borrowers” to disguise the fact that they were ultimately lent to the owners, many of whose business undertakings had gone soars during the global recession. Most of this essentially stolen money was never recovered.

As Kabulbank was the primary vehicle for the direct deposit of government employees’ salaries it would have been a disruptive, backward step to close it all together. So New Kabul Bank was established the same day the old one was closed by transferring to it Kabul Bank’s good assets (mainly bailout loans from the central bank) and by it assuming Kabul Bank’s remaining deposit liabilities – what is known as a good bank-bad bank split. By the time of the split, Kabul Bank’s $1.3 billion in deposits had fallen to $0.6 billion.

Readers of Cayman Financial Review could read my account of the unfolding of the Kabul Bank story in the January, April and August, 2015 issues. But now they can read the more complete, shocking story from Abdul Fitrat, the governor of Da Afghanistan Bank at that time, who ultimately fled to the United State for his personal safety in June 2011.

Qaseem Rahimi, then Head of Banking Supervision Dept of DAB (now Second Deputy Governor), Abdul Qadeer Fitrat, then Governor of DAB (now resident of Virginia), Warren Coats, Masood Musa Ghazi, then conservator of Kabul Bank and CEO of New Kabul Bank (now resident of Virginia).
Qaseem Rahimi, then Head of Banking Supervision Dept of DAB (now Second Deputy Governor), Abdul Qadeer Fitrat, then Governor of DAB (now resident of Virginia), Warren Coats, Masood Musa Ghazi, then conservator of Kabul Bank and CEO of New Kabul Bank (now resident of Virginia).

Following an introductory chapter that traces his own rise from humble village beginnings to the head of Da Afghanistan Bank (DAB), Fitrat sets the stage for the crisis to come by reviewing the state of Afghanistan’s economy and fledgling banking sector following the collapse of the Taliban regime.

As governor of the central bank Fitrat implemented a merit based personal policy for hiring and promoting staff, much to the anger of parliamentarians with family and relatives wanting jobs in the central bank. He dismissed one thousand unqualified and unneeded “zombie” employees with reasonable severance pay. DAB’s staff began to look and feel like professionals. The book traces the slow but steady build up of DAB’s capacities including in the supervision of banks. Initially the establishment of Kabul Bank by Sherkhan Farnood, a well-known local moneychanger, was welcomed. But the astounding rate of its growth was worrisome.

As often happens suspicions that not all was right at Kabul Bank, which had grown from zero in 2004 to by far the largest bank in Afghanistan by 2010, were first raised by an article in the Washington Post in February 2010. In response, Governor Fitrat asked the U.S. Treasury for help in conducting a forensic audit of the bank. While supportive, the Treasury dragged its feet until it was too late.

From the onset of depositor runs on Kabul Bank starting on Sept. 1, 2010, Fitrat was at war with diverse and usually corrupt Afghan interests. The corrupt attorney general rounded up Qaseem Rahimi, then the head of the banking Supervision Department, and 25 other DAB staff from their offices and detained them in the basement of the AGO’s building for 12 hours of questioning and mug shots, while the real criminals, the founders of Kabul Bank continued dining in their favorite restaurants around Kabul.

Fitrat provides the shocking details of the conviction in sham trails and jailing of nine central bank staff for failing to uncover the crimes of the corrupt founders of Kabul Bank, Sherkhan Farnood and Khalilullah Ferozi. Though Farnood and Ferozi were also convicted and given longer jail terms, they continued to show up for dinner at their favorite restaurants.

When Governor Fitrat told a parliamentary hearing all that he knew April 27, 2011, he 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. While testifying before parliament Governor Fitrat named Mahmoud Karzai, the brother of President Karzai, and Haji Haseen Fahim, the brother of Vice-President Qasim Fahim, as participants in the Kabul Bank frauds. Mahmoud Karzai was the third largest shareholder of Kabul Bank owning shares “purchased” with money lent by Kabul Bank.

This tragic story has many parts and Governor Fitrat was involved in most of them. His telling of the Kabul Bank story is riveting. Fitrat is smart, hard working, and honest. In his book, he lays out the facts as they unfolded, displaying the personal courage that has characterized his service in the central bank even before the Kabul Bank tragedy fell on the central bank and on Afghanistan.