Kabul Bank Crisis

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10 September 2010

Special Report on Economic Development in Afghanistan

The Kabul Bank Crisis

What Happened & What It Means for Development, Governance & Security in Afghanistan

Steven A. ZyckEconomic Development Knowledge Manager

[email protected]

This document provides an overview of the crisis surrounding Kabul Bank. Further information is

available at www.cimicweb.org.1

Sources for all information can be accessed by followingthe hyperlinks embedded in the text.

Summary

Kabul Bank, the largest private financial institution in Afghanistan, has recently generated losses of aroundUSD 300 million and has undergone a major change in senior management, according to major mediaoutlets. Afghan government personnel and institutions reportedly brought about this change in management

and have played an increasing role in stabilising the bank by guaranteeing its deposits, offering loans andproviding physical security. Large-scale withdrawals were motivated by media reports and depositorsresulting decline in confidence; depositor confidence in the bank seems to have somewhat rebounded as a

result of assurances that all deposits in the bank would be guaranteed by the Afghan government andbacked up by public loans. However, significant implications exist for the economy, governance and security,

with the Kabul Bank crisiswhich has involved relatives of Afghanistans President and First Vice President serving as a powerful reminder of the scope of financial mismanagement and corruption in Afghanistanahead of parliamentary elections scheduled for 18 September.

1. Background

The arrival of the four-day Eid ul-Fitr public holidays in Afghanistan on the evening of 08September marked not only the beginning of celebrations but also a brief respite forKabul Bank.This private financial institution, the largest in Afghanistan, experienced a week- long run bydepositors, who attempted to withdraw a significant proportion of the approximately USD 1.3billion held in bank accounts. The situation was closely followed by Afghan and international

stakeholders given its potential impact on Afghanistans economy and political system and giventhe role played by Kabul Bank in channelling payments to more than 250,000 Afghan teachers,police officers and soldiers.

The situation began more than a month ago at a meetingwhere the Governor ofAfghanistansCentral Bank commonly referred to as Da Afghanistan Bank (DAB) presented evidence of KabulBanks illicit dealings to Afghan President Hamid Karzai and others, including General David

1 A CMO user account may be required to access some of the links in this document.
mailto:[email protected]:[email protected]://www.cimicweb.org/http://www.cimicweb.org/http://www.cimicweb.org/http://www.demotix.com/news/432331/eid-al-fitr-celebrated-kabul-afghanistanhttp://www.demotix.com/news/432331/eid-al-fitr-celebrated-kabul-afghanistanhttp://www.kabulbank.com/html/index.aspxhttp://www.kabulbank.com/html/index.aspxhttp://www.kabulbank.com/html/index.aspxhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://news.yahoo.com/s/time/20100906/wl_time/08599201623200/printhttp://news.yahoo.com/s/time/20100906/wl_time/08599201623200/printhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.centralbank.gov.af/http://www.centralbank.gov.af/http://www.centralbank.gov.af/http://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.centralbank.gov.af/http://www.centralbank.gov.af/http://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://news.yahoo.com/s/time/20100906/wl_time/08599201623200/printhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/08/31/AR2010083106082_pf.htmlhttp://www.kabulbank.com/html/index.aspxhttp://www.demotix.com/news/432331/eid-al-fitr-celebrated-kabul-afghanistanhttp://www.cimicweb.org/http://www.cimicweb.org/mailto:[email protected]


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Petraeus, the commander of US and NATO Forces in Afghanistan. Following this meeting,President Karzai decided to take action to address the problem posed by the bank, a decision

which was spurred by the news in August that the bank had lost approximately USD 300 million.

The media first reported on 31 August that DAB had taken over Kabul Bank and forced theresignation of its Chairman and Chief Executive Officer (CEO), replacing the latter with DABs ownChief Financial Officer (CFO). DAB and Kabul Bank both claim that the removal of the banks twotop leaders had been voluntary and in compliance with a June 2010 regulation forbiddingshareholders from being senior managers. However, the media indicated that the Afghangovernment had threatened the two managers, particularly the banks chairman, SherkhanFarnood, with arrest if they did not resign and return approximately USD 160 million in Dubaiproperty to Kabul Bank. This property had been purchased with resources from the bank but hadbeen officially registered as the personal property of Farnood and his wife rather than as KabulBank assets.

Property in Dubai was to become a major issue as the crisis unfolded. According to numerousmedia outlets, including the New York Times and Al Jazeera, Mahmoud Karzai, brother of the

Afghan President and the third-largest shareholder in Kabul Bank, had recently been residing in avilla in Dubai which was purchased with money loaned by Kabul Bank in 2007. According to KabulBanks now-ousted chairman, Farnood, many properties in Afghanistan were purchased in his andhis wifes names at the behest of powerful and wealthy Afghans in violation of Afghan law, whichdisallows the concealment of assets overseas using loans from Kabul Bank. When confrontedabout this practice earlier in 2010,Farnoodtold the Washington Postthat [w]hat I'm doing is notproperBut this is Afghanistan. These villas allowed Kabul Bank to use bank resources as a meansof influence-peddling by offering luxury accommodation in Dubai to influential and powerful

Afghans and their families, a practice which The Washington Postreferred to as a form ofcronycapitalismin their first piece about the bank in February 2010.

Other troubling activities involving Kabul Bank and its senior managers were also reported. TheWall Street Journal, citing information provided by US officials, claimed that Kabul Bank had movedalmost USD 1 billion out of Afghanistan via New Ansari Exchange, the largest of Afghanistans

clandestine money-transfer (or hawala) networks. Farnood had, furthermore, been accused ofusing funds tocover losseson another of his businesses,Pamir Airways, according toAl Jazeera.In sum it appeared as if Kabul Banks losses were rooted in a number of investments, such asthose in Dubai real estate and Pamir Airways, which were either unlikely to or not intended togenerate profits, thus resulting in the significant losses which prompted the Afghan government tobecome involved.

As news of Kabul Banks troubles reached the Afghan media and population, depositors becamenervous about the safety of their money. Between Wednesday, 01 September and the closure ofthe banks for the Eid ul-Fitrholidays on Wednesday, 08 September, depositors rushed to withdrawmoney from Kabul Banks 68 branches throughout Afghanistan. At one branch in Kabul, forinstance, bank employees informed the New York Timesthat approximately1,700 customerswereserved each day during the height of the crisis. The volume of depositors and their singularrequest to withdraw most or all of their money from the bank resulted in cash shortagesat
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many branches. The Bloomberg News Service described the experience of one constructioncompany owner who attempted to withdraw USD 15,000 but was only permitted to take USD

1,000 from Kabul Banks main branch in Kabul. In the city of Mazar -e Sharif in northern Afghanistan, another businessman told the Associated Pressthat he was able to withdraw onlyUSD 5,000of the more than USD 50,000 he had deposited with the bank.

Box 1. How Much Money Was Withdrawn?

The total amount of money withdrawn from Kabul Bank remains unknown, according to DAB, though mediareports have suggested that the amount is between USD 200 million and USD 300 million. However, theunderlying calculations are unclear and do not seem to reflect daily withdrawal figures reported by the

media. For instance, withdrawals of USD 85 million and USD 109 million were noted on 01 and 02September, respectively. While closed on Friday, 03 September, subsequent and large-scale withdrawals

were reported from Saturday, 04 September through Wednesday, 08 September. While figures for this time

period except for Monday, whenUSD 67 millionwas reportedly taken out by depositors are unknown, itappears as if USD 300 million in withdrawals should be viewed as the absolute minimum; far more may have

actually been withdrawn. Some funds have been injected into Kabul Bank during the crisis but wereoverwhelmingly from the Afghan government for salaries of the more than 250,000 Afghan civil servantswho receive their pay via the bank. To protect these funds, the Afghan Ministry of Finance has also orderedthat the USD 100 million to USD 150 million in government funds held at Kabul Bank remain untouchedexcept to pay salaries.

2. The Afghan Government Response

Throughout the crisis, the Afghan government played a key and highly visible role. Regardless ofones interpretation of events, the Afghan government brought about the change in leadership atKabul Bank which, while necessary, made the banks financial weaknesses a matter of publicknowledge. Afghan officials subsequently took steps to cool tensions among depositors, thebusiness community, international stakeholders and the broader Afghan public, with PresidentKarzai, Minister of Finance Omar Zakhilwal and DAB Governor Abdul Qadir Fitrat making numerousstatementson the fundamental soundness of Kabul Bank. Such comments, however, seemed to dolittle to reassure anxious depositors, who continued to withdraw money from the bank in largenumbers.

The situation appeared to calm slightly after Thursday, 02 September when President Karzai, at apress conference with US Secretary of Defense Robert Gates, announced that the Afghangovernment would guarantee all funds entrusted to Kabul Bank. President Karzai reportedly said

the following: The Kabul Bank is safe. The government of Afghanistan is fully behind thebankWe have got at least $4.8 billion in cash; even if the whole financial system in Afghanistancollapses we still have the money to support it. However, given that withdrawals reportedly stayedstrong in the few days after the government issued this statement, it is not fully understoodwhether the guarantee or some other dynamic (e.g., the completion of withdrawals by the mostapprehensive depositors) caused the situation to improve. Indeed, the greatest improvementsseemed to follow not from the Afghan governments guarantees but from the announcement twodays later that the government was ready and willing to loan Kabul Bank as much money asnecessary to ensure its continued liquidity. US government spokespersons confirmed that the
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American government would provide technical assistance for efforts to stabilise Kabul Bank butwould not provide any direct financing for a bail out.2

Beyond steps to improve public confidence in Kabul Bank, the Afghan government also shiftedresponsibility for security at Kabul Bank branches from Khurusan Security Services, a privatecompany affiliated with the banks former CEO, to the Afghan National Police (ANP) and NationalDirectorate of Security (NDS), the domestic intelligence agency, as of 05 September.

Initial progress was also made in recouping losses from Kabul Banks major shareholders and loanrecipients. Five individuals, including the former Chairman, CEO and Deputy CEO, wereforbiddento sell any property held in their name within the capital, according to the Washington Post. Theother two individuals affected by the asset freeze are Haseen Fahim, the brother of AfghanistansFirst Vice President, and a businessman,Abdul Ghafer Dawi, who the Washington Postdescribesas having large outstanding loans with the bank.3 While symbolically important in suggesting that

individuals involved in creating the Kabul Bank crisis would face consequences, the widely reportedasset freezeapplied only to real estate in Kabul rather than throughout the country and hadno bearing on these individuals other assets, particularly their bank accounts in Afghanistan andoverseas. For example, Britains Guardiannewspaper found that officials in Dubai or elsewhere inthe United Arab Emirates (UAE) had not received any requests to freeze assets of implicatedindividuals. Furthermore, the fact that these restrictions did not apply to Mahmoud Karzai, thebanks third-largest shareholder and brother of the Afghan President who does not own propertyin his own name in Kabul was greeted with suspicion by the international media and by

Afghanistans international donors, who began calling for an investigation once the situationseemed to be cooling.

3. Implications of the Kabul Bank Crisis

There are a range of economic, governance and security implications of the ongoing crisis. Despitethe fact that a relatively small proportion of Afghans estimated at3%by Reuters have bankaccounts, the reach of this incident is much broader. It conveys implicit messages which arebeing watched and interpreted by a significant proportion of the Afghan population, includinginsurgent elements.

3.1 Economic Implications

Despite reassuring statements from DAB and the slowdown in withdrawals from Kabul Bank,Afghan and foreign investors will likely grow less willing to invest in Afghanistan if they fear that

the banking system cannot be entrusted with their funds (or that it may collapse and negativelyeffect the entire economy). According to a Financial Times interview with former Afghan Ministerof FinanceAshraf Ghani, depositors are likely to grow increasingly concerned about storing theirmoney within the formal banking system unless confidence-building measures are implemented.Fewer deposits will significantly undermine banks liquidity and their corresponding ability to lend.

2The Economistnoted, however, that given that 90% of the Afghan governments budget is provided byinternational donors, American funds will indirectly contribute to any bail out of Kabul Bank.3 A company owned by Haseen Fahim was also subject to the asset freeze.
http://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7983033/America-refuses-to-bail-out-Kabul-Bank.htmlhttp://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7983033/America-refuses-to-bail-out-Kabul-Bank.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.guardian.co.uk/world/2010/sep/06/afghanistan-bank-assets-freezehttp://www.guardian.co.uk/world/2010/sep/06/afghanistan-bank-assets-freezehttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://online.wsj.com/article/SB10001424052748704392104575475932719164688.htmlhttp://online.wsj.com/article/SB10001424052748704392104575475932719164688.htmlhttp://www.reuters.com/article/idUS297304619920100831http://www.reuters.com/article/idUS297304619920100831http://www.reuters.com/article/idUS297304619920100831http://www.ft.com/cms/s/0/dd63057a-bc01-11df-a972-00144feab49a.htmlhttp://www.ft.com/cms/s/0/dd63057a-bc01-11df-a972-00144feab49a.htmlhttp://www.economist.com/blogs/democracyinamerica/2010/09/afghanistanhttp://www.economist.com/blogs/democracyinamerica/2010/09/afghanistanhttp://www.economist.com/blogs/democracyinamerica/2010/09/afghanistanhttp://www.ft.com/cms/s/0/dd63057a-bc01-11df-a972-00144feab49a.htmlhttp://www.reuters.com/article/idUS297304619920100831http://online.wsj.com/article/SB10001424052748704392104575475932719164688.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.guardian.co.uk/world/2010/sep/06/afghanistan-bank-assets-freezehttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7983033/America-refuses-to-bail-out-Kabul-Bank.html


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Capital for nascent entrepreneurs may be harder to find, though micro and small enterprises willlikely find the microfinance market, which is increasingly trusted given its widespread adoption of

Islamic lending methods, unaffected.

Box 2. Overview of Banking in Afghanistan

Banking in Afghanistan has largely been built from scratch since 2002. The pre-existing banking regulationswere primarily based uponSoviet procedures. Likewise, private banks had been forbidden under the Taliban,and informal banking and money exchanges proliferated. The hawala system, while best known fortransferring money across the world, was also used to take deposits and provide loans before, during andsince the Taliban era in Afghanistan.

Key Banking Indicators in Afghanistan, 2004-2008

The international reconstruction process in Afghanistan since 2002 brought with it a high degree of attentionto banks and the introduction of new banking regulations in 2003 and early 2004. Regulatory reform and thefounding of DAB were followed by rapid growth in commercial banking. Since 2003, Afghanistan had grownfrom just two state-owned banks to17 banksin 2009 with several billion US dollars in deposits; themicro-finance industry was also booming throughout the country thanks primarily to international organisationsand NGOs. Challenges were increasingly visible, however, given the low ratings provided to most of

Afghanistans banks by the International Monetary Fund (IMF) and others. Lending grew rapidly amongrecently established, private Afghan banks despite contextual challenges such as corruption and limitedcontract enforcement, which would make it difficult for lenders to ensure repayments. Furthermore, studieshave shown that banks tended to value personal reputation or other non-financial factors in giving loansrather than any assessment of the borrowers business; financial statements for businesses requesting loanswere rarely requested. TIME Magazine first recognised in 2006, a fact which, with some exceptions, stillapplies today: Afghanistans banking sector is largely unregulated, and loan officers have little experience inassessing the risk of business lending.

The banking and finance sector in Afghanistan is likely to suffer as a result of this crisis.Commercial banksas well as the Afghan governments regulatory capacity have been undercut by

recent events, thus making it unlikely that the two state-run or the 14 other commercial banks willpick up a significant proportion of current and future depositors fleeing Kabul Bank. Individualsand businesses with larger sums to deposit are likely to sidestep the Afghan banking systemaltogether if possible and establish accounts with international banks offering services in

Afghanistan. Smaller depositors may also be attracted by emerging savings schemes beingdesigned by microfinance institutions (MFIs) in Afghanistan or may prefer to keep possession oftheir money rather than keeping it at any bank. Customary and informal banking systems, such asthose utilised during the 1980s and following the rise of the Taliban in the mid-1990s, are likely togrow, thus reversing the trend towards formalisation in Afghanistans banking sector. Hawala

2004 2005 2006 2007 2008

Total Assets 261 386 614 1083 1674

Cash and Bank Balances 139 212 295 431 578

Loans and Advances 18 58 162 439 805

Total Deposits 60 182 394 812 1278

Source:Da Afghanistan Bank and the International Monetary Fund
http://knowledge.insead.edu/islamicmicrofinance080205.cfmhttp://knowledge.insead.edu/islamicmicrofinance080205.cfmhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://books.google.com/books?hl=en&lr=&id=OgF1XZUQsj0C&oi=fnd&pg=PR5&dq=hawala+exchanges&ots=Q88oGa5IlT&sig=QNl7HEiipkJZpDhJkB_XUCUtHlo#v=onepage&q=hawala%20exchanges&f=falsehttp://books.google.com/books?hl=en&lr=&id=OgF1XZUQsj0C&oi=fnd&pg=PR5&dq=hawala+exchanges&ots=Q88oGa5IlT&sig=QNl7HEiipkJZpDhJkB_XUCUtHlo#v=onepage&q=hawala%20exchanges&f=falsehttp://books.google.com/books?hl=en&lr=&id=OgF1XZUQsj0C&oi=fnd&pg=PR5&dq=hawala+exchanges&ots=Q88oGa5IlT&sig=QNl7HEiipkJZpDhJkB_XUCUtHlo#v=onepage&q=hawala%20exchanges&f=falsehttp://www.centralbank.gov.af/CompleteNewsDescription.php?NewsId=10http://www.centralbank.gov.af/CompleteNewsDescription.php?NewsId=10http://www.centralbank.gov.af/CompleteNewsDescription.php?NewsId=10http://www.misfa.org.af/http://www.misfa.org.af/http://www.misfa.org.af/http://www.misfa.org.af/http://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.time.com/time/magazine/article/0,9171,1565618,00.htmlhttp://www.time.com/time/magazine/article/0,9171,1565618,00.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090806888.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090806888.html?hpid=topnewshttp://www.misfa.org.af/pdf/Savings%20Demand%20Study.pdfhttp://www.misfa.org.af/pdf/Savings%20Demand%20Study.pdfhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090806888.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090806888.html?hpid=topnewshttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090806888.html?hpid=topnewshttp://www.misfa.org.af/pdf/Savings%20Demand%20Study.pdfhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090806888.html?hpid=topnewshttp://www.time.com/time/magazine/article/0,9171,1565618,00.htmlhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.misfa.org.af/http://www.misfa.org.af/http://www.centralbank.gov.af/CompleteNewsDescription.php?NewsId=10http://books.google.com/books?hl=en&lr=&id=OgF1XZUQsj0C&oi=fnd&pg=PR5&dq=hawala+exchanges&ots=Q88oGa5IlT&sig=QNl7HEiipkJZpDhJkB_XUCUtHlo#v=onepage&q=hawala%20exchanges&f=falsehttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://knowledge.insead.edu/islamicmicrofinance080205.cfm


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exchanges, in particular, are likely to see a significant resurgence as a result of the Kabul Bankcrisis.

3.2 Governance Implications

One depositor succinctly described his feelings regarding the government and the bank whenstating the following to Agence France-Presse: The bank is finished. The government can makeassurances, but the problem is that no one here trusts the government. The governments inabilityto contain the Kabul Bank crisis with re-assuring statements reflected the states limited credibilityamong the Afghan population; however, the crisis also appears to have further eroded thepopulations trust in Afghan government officials and institutions. The banks former chairman,Farnood, was a close adviser to President Karzai during his re-election campaign in 2009; KabulBank also allegedly provided as much as USD 14 million for President Karzais campaign.Furthermore, with his brother being the third-largest shareholder in Kabul Bank, President Karzaisattempts to restore confidence in the bank and his offers of government loans have beeninterpreted by political opponents as self-interested. Abdullah Abdullah, Hamid Karzais principalrival in last years presidential election, suggested that personal rather than national interests werethe driving force behind the Afghan Presidents support for Kabul Bankduring a press conference,saying You are the president of a country and your prime responsibility is to help your ownfamily?

Perceptions that corruption may have contributed to the Kabul Bank crisis or had prevented astronger government response appeared particularly potent. While Afghans commonly expresstheir discontentment withcorruptionwithin the Afghan public administration, this instance seemedto be in some respects worse given that the funds being put at risk belonged toordinaryAfghans

rather than foreign donors. The imagery of Afghanistans political and economic elite abusing themoney of school teachers and Afghan police and soldiers in order to fund luxurious retreats inDubai was repeated in a number of editorials. Summarising a common sentiment in Kabul, TIMEMagazine reported the following: While complaints over systemic graft have been a commonrefrain among ordinary Afghans unhappy with their government, the prospect however real ordistant of personal deposits falling into jeopardy due to alleged insider dealings has beenreceived particularly emotively.

Such sentiments were particularly significant given that they emerged during Ramadanand shortlybefore Eid ul-Fitr, which are Islamic holidays that stress self-sacrifice, modesty, spirituality andcharity. As such, this crisis may have far-reaching political and governance implications which willinfluence the upcoming 18 September Parliamentary elections and attempts to undermine the

insurgency by building popular support for the Afghan government. Indeed, given the Talibanregimesprevious banon commercial banks, the insurgency may be able to use this crisis to polishits image.

3.3 Security Implications

It remains without question that the economic and, in particular, governance implications notedabove will have an effect on security. A government which has lost a portion of its legitimacy
http://www.nytimes.com/2010/09/03/world/asia/03kabul.html?ref=world&pagewanted=printhttp://www.nytimes.com/2010/09/03/world/asia/03kabul.html?ref=world&pagewanted=printhttp://www.google.com/hostednews/afp/article/ALeqM5iXYFB9de-Aj2AFHPuipSGfYWmz6whttp://www.google.com/hostednews/afp/article/ALeqM5iXYFB9de-Aj2AFHPuipSGfYWmz6whttp://asiafoundation.org/publications/pdf/627http://asiafoundation.org/publications/pdf/627http://asiafoundation.org/publications/pdf/627http://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://www.stevezyck.com/publications/10-02_Karzai-Curse-ISA-Paper.pdf?attredirects=0&d=1http://www.stevezyck.com/publications/10-02_Karzai-Curse-ISA-Paper.pdf?attredirects=0&d=1http://www.stevezyck.com/publications/10-02_Karzai-Curse-ISA-Paper.pdf?attredirects=0&d=1http://www.washingtonpost.com/wp-dyn/content/article/2010/09/05/AR2010090501144.html?hpid=topnewshttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://asiafoundation.org/publications/pdf/627http://www.google.com/hostednews/afp/article/ALeqM5iXYFB9de-Aj2AFHPuipSGfYWmz6whttp://www.nytimes.com/2010/09/03/world/asia/03kabul.html?ref=world&pagewanted=print


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during the crisis and an insurgency which may receive added support will certainly have a directimpact, which must be closely monitored, upon stabilisation efforts. Given that such implications

have yet to emerge, this report will primarily concern itself with the direct and short-term securityimplications of the crisis.

Soon after the media began reporting on the financial difficulties being faced by Kabul Bank,Al-Jazeera suggested that conflicts between unpaid workers, private security guards and armeddepositors were feared by some in Afghanistan. Yet, the Kabul Bank crisis was notable in that fewsecurity incidents were reported. Depositors attempting to withdraw funds from the bank weredescribed as panicked and angry but not violent, even in those instances in which particularbranches were, due to cash limitations, unable to provide customers with the full amountsrequested. The most notable security incident resulting from the crisis occurred on Wednesday, 08September in the final hours before the main Kabul Bank location closed for the Eid ul-Fitrholiday.

A group of more than 500 depositors comprised mostly of civil servants who were attempting towithdraw their recent salary payments from the bank in advance of the four-day holiday werereportedly punched, shoved and threatened by members of the Afghan domestic intelligenceservice, the NDS, who were guarding the branch. No further violence was reported, thoughtensions were running high among Afghan civil servants, including members of the securityservices, who were unable to withdraw funds from their Kabul Bank accounts in advance of animportant and frequently expensive holiday weekend.

4. Conclusion

The Kabul Bank crisis will have wide-reaching and likely long-term effects on economicdevelopment, governance and, perhaps, security in Afghanistan. The governments response, in

particular, will merit close attention during the upcoming months, and investor confidence shouldbe bolstered in order to prevent this crisis from impeding what have hitherto been impressive ratesofeconomic growthin Afghanistan.

The Civil Military Fusion Centre (CFC) is an Information and Knowledge Management organisation focused on

improving civil-military interaction, facilitating information sharing and enhancing situational awareness through

the web portal, CimicWeb. CFC products are developed with open-source information from governmental

organisations, non-governmental organisations, international organisations, academic institutions, media sources

and military organisations. By design, CFC products or links to open sourced and independently produced articles

do not necessarily represent the opinions, views or official positions of any other organisation.
http://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://www.time.com/time/world/article/0,8599,2016232,00.htmlhttp://www.time.com/time/world/article/0,8599,2016232,00.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090800821.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090800821.htmlhttp://devdata.worldbank.org/AAG/afg_aag.pdfhttp://devdata.worldbank.org/AAG/afg_aag.pdfhttp://devdata.worldbank.org/AAG/afg_aag.pdfhttp://devdata.worldbank.org/AAG/afg_aag.pdfhttp://www.washingtonpost.com/wp-dyn/content/article/2010/09/08/AR2010090800821.htmlhttp://www.time.com/time/world/article/0,8599,2016232,00.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.htmlhttp://english.aljazeera.net/news/asia/2010/09/20109165312658201.html


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Annex A. Additional Resources

Research and Organisational Reports Arteaga, Ximena. 2009. Assessing the Demand for Savings Services among Microfinance

Clients in Afghanistan. Kabul: Microfinance Investment Support Facility for Afghanistan.

International Monetary Fund. 2008. Islamic Republic of Afghanistan: Selected Issues.Washington, DC: International Monetary Fund.

Pavlovi, Jelena and Joshua Charap. 2009. Development of the Commercial Banking System inAfghanistan: Risks and Rewards. Washington, DC: International Monetary Fund.

Websites

Kabul Bank http://www.kabulbank.com/html/index.aspx

Da Afghanistan Bank http://www.centralbank.gov.af/ Afghan Ministry of Finance http://www.mof.gov.af/

Annex B. Shareholders in Afghanistans Kabul Bank

Shares % Ownership

1. Mr. Sherkhan Farnood 78,083 28.162. Mr. Khalilullah Ferozi 78,083 28.163. Mr. Mahmood Karzai 20,548 7.414. Mr. Mohmmad Taheer 18,699 6.745. Mrs. Farida Farnood 18,534 6.686. Mr. Haji Sherin Khan 16,439 5.937. Mr. Ghulam Farooq Naseeb 8,219 2.968. Mr. Zahed Faheem 8,219 2.969. Dr. Ahmad Javid 6,000 2.1610.Mr. Jamal Khil 5,343 1.9311.Mr. Nesar Ahmad 4,726 1.7012.Mr. Abdul Rab 4,110 1.4813.Mr. Hayatullah 4,110 1.4814.Mr. Mohammad Ihsan Rafet 2,466 0.8915.Mr. Shokrullah Shokran 2,055 0.7416.Mr. Rabiullah Kakar 1,644 0.59Totals 277,278 100

Source: Kabul Bank,Financials.
http://www.misfa.org.af/pdf/Savings%20Demand%20Study.pdfhttp://www.misfa.org.af/pdf/Savings%20Demand%20Study.pdfhttp://www.imf.org/external/pubs/ft/scr/2008/cr0871.pdfhttp://www.imf.org/external/pubs/ft/scr/2008/cr0871.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.kabulbank.com/html/index.aspxhttp://www.kabulbank.com/html/index.aspxhttp://www.centralbank.gov.af/http://www.centralbank.gov.af/http://www.mof.gov.af/http://www.mof.gov.af/http://www.kabulbank.com/html/Financials.htmlhttp://www.kabulbank.com/html/Financials.htmlhttp://www.kabulbank.com/html/Financials.htmlhttp://www.kabulbank.com/html/Financials.htmlhttp://www.mof.gov.af/http://www.centralbank.gov.af/http://www.kabulbank.com/html/index.aspxhttp://www.imf.org/external/pubs/ft/wp/2009/wp09150.pdfhttp://www.imf.org/external/pubs/ft/scr/2008/cr0871.pdfhttp://www.misfa.org.af/pdf/Savings%20Demand%20Study.pdf