By Joshua Partlow and Andrew Higgins
KABUL - Afghanistan's Central Bank has taken control of the country's biggest and most politically potent private bank and ordered its chairman to hand over $160 million worth of luxury villas and other real estate purchased in Dubai for well-connected insiders, according to Afghan bankers and officials.
Kabul Bank Gov. Abdul Qadir Fitrat, center, speaks along with other officials of the central bank during a press conference in Kabul, Afghanistan, Wednesday, Sept. 1, 2010
The intervention aims to shore up a key pillar of the Afghan economy and also of the battle against the Taliban - both of which have been marred by rampant corruption.
Kabul Bank handles salary payments for Afghan soldiers, police and teachers, and has taken $1.3 billion in deposits from ordinary Afghans. It has said it has $500 million in liquid cash.
Kabul Bank's wayward lending practices, real estate speculation in Dubai and weeks of venomous feuding between major shareholders have threatened to wreak economic and political havoc.
U.S. officials have long worried that Kabul Bank, because of its size and unorthodox practices, could trigger financial mayhem, a prospect that would leave Afghan security forces without pay, threaten unrest by angry - and often armed - depositors and undermine President Obama's Afghan strategy.
Shareholders insisted in interviews that Kabul Bank is solvent. The extent of its bad loans, many of them to the families and friends of powerful politicians, is unclear.
Some Afghan businessmen said they consider President Hamid Karzai's decision to confront Kabul Bank his first significant move in the fight against corruption in Afghanistan. U.S. officials have often prodded Karzai to crack down on graft in his government and have complained that the Afghan leader has not taken a firm enough stand, and has even intervened to protect suspects who are close to him.
Kabul Bank's chairman, Sherkhan Farnood, a world-class poker player, and its chief executive, a former gem trader, were forced to resign Monday after being threatened with arrest if they did not accept a management purge ordered by Karzai, said people familiar with the showdown.
The bank - which is partly owned by Karzai's brother Mahmoud - has been placed in the hands of the Central Bank's chief financial officer, who was installed as chief executive. He will dig into the bank's accounts in search of illegal, off-the-book loans totaling perhaps hundreds of millions of dollars and try to recover assets.
Karzai chose to move on Kabul Bank after he received evidence of the bank's illicit dealings from Abdul Qadir Fitrat, the Central Bank governor, at a meeting about a month ago. Gen. David H. Petraeus, the top U.S. commander in Afghanistan, attended the meeting, according to Kabul Bank insiders, who spoke on the condition of anonymity and said that Petraeus urged Karzai to take action.
Two bank shareholders said Farnood had helped force the hand of Afghan authorities by providing the U.S. Embassy in Kabul with details of irregular lending. This information, they added, prompted Petraeus to press Karzai to clean house. Farnood denied this.
Karzai initially hesitated to act and, people close to the matter said, ordered a full-scale purge only on Sunday, after a stormy and inconclusive meeting between bank managers and the Central Bank that day.
Speaking Tuesday night at his seafront villa in Dubai - which was paid for by Kabul Bank - Mahmoud Karzai, who owns 7 percent of Kabul Bank, said: "My brother did a very good thing. Now the bank can play by the rules." He said he will vacate his villa soon and rent accommodations elsewhere. Kabul Bank, he said, should "invest in Afghanistan, not outside."
Kabul Bank previously had been shielded by the political clout of its shareholders who, in addition to Mahmoud Karzai, include Haseen Fahim, the brother of Vice President Mohammed Fahim. Kabul Bank also contributed to President Karzai's reelection campaign last year.
The Central Bank has not taken ownership of Kabul Bank, but control of its management. The new acting chief executive, Central Bank official Masood Ghazi, is expected to be in place for three months until the Central Bank can recruit independent management. He replaced Khalilullah Fruzi, a onetime gem merchant whose brother controls Kabul Bank's heavily armed security force.
Kabul Bank was once hailed as a banking pioneer in Afghanistan, where it introduced ATMs, produced glossy brochures and drummed up business by holding prize drawings for depositors. But it then expanded into the airline business, took in politically connected figures as shareholders and became an emblem of the cowboy crony capitalism that has helped disfigure the country since the U.S.-led rout of the Taliban in late 2001.
Murky transactions by Kabul Bank, first detailed by The Washington Post this year, include large property purchases in Dubai with bank money. The properties include at least 16 multimillion-dollar villas on Palm Jumeirah, a luxury development in the Persian Gulf, and two towers under construction. All were registered in the name of Farnood and his wife.
Farnood, the bank's founder and ousted chairman, initially balked at stepping down. But, at the meeting at the Central Bank on Monday, he did so after being warned that police would be called, according to people familiar with the matter. He agreed to a request from the Central Bank that he transfer the titles to all of his and his wife's properties in Dubai to Kabul Bank.
Several of the Palm Jumeirah waterfront villas, each with a swimming pool, are occupied by prominent Afghans, including Mahmoud Karzai, who used to run an Afghan restaurant in Baltimore.
The Central Bank had sought to keep secret its plans for Kabul Bank, fearing that public speculation about its solvency could spark a run on the bank, which has branches across the country. "We don't want to make a panic in the market, so we are handling it very carefully," said one Central Bank official who spoke on the condition of anonymity.
The bank's future will depend in part on the Dubai property market, where the price of real estate purchased with cash from the bank has plummeted and created big losses, at least on paper. Another major source of concern, bankers and officials said, is a hidden web of large loans, many of them to Kabul Bank's own shareholders. Afghan regulators did not uncover the insider loans, which exceeded legal limits, despite extensive assistance from the United States.
Kabul Bank's biggest creditor, bank insiders said, is Haseen Fahim, a minority shareholder, who borrowed tens of millions of dollars to fund various business ventures, which in turn won contracts at U.S. bases and sites in Afghanistan operated by the CIA.
Fahim, who is in Germany with his ailing brother, the vice president, said in a telephone interview that he took loans totaling $92 million from Kabul Bank. He recently paid back $26.5 million and said his assets, including a Kabul gold market, are worth far more than his bank debts.
Fahim described the Central Bank action as hasty and said that authorities should have allowed shareholders time to return the overseas money. His home in Dubai, he said, is registered in his name and was bought with personal money.
"Naturally, this will affect the market," he said.
Kabul Bank's two biggest shareholders are Farnood, the ex-chairman, and Fruzi, the former chief executive. The two men, both Russian speakers who spent years in Russia and the former Soviet bloc, have in recent weeks been locked in a tumultuous struggle for control of the bank.
"As both sides were going at each other, and then going to external entities, that made the president nervous, that made American investigators nervous and that made the Central Bank nervous," said a person familiar with the clash. "And that led to this decision."
A senior Afghan official said that the Central Bank's intervention took care of the problems at Kabul Bank. "There is nothing to worry about," he added.