England's White Dragon

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Monday, 28 March 2011

How the Afghan elite borrowed freely from Kabul Bank

How the Afghan elite borrowed freely from Kabul Bank, being
like British MP’s seems to be the Afghan style? CORRUPTED

KABUL, Afghanistan — When a brother and nephew of an Afghan
vice president wanted to build up their fuel transport business, they took out
a $19 million loan from Kabul Bank. When a brother of the president wanted to
start a cement factory, he took out a $2.9 million loan; he also took out $7.9
million for a luxury townhouse in Dubai. When the bank’s chief executive
officer wanted to invest in newly built apartments in Kabul, he took almost $18

The terms were hard to beat: no collateral, little or no
interest. And repayment optional, at least in practice

Those are just a few of the loans detailed in a damning
internal report by Afghanistan’s own Central Bank, which depicts the Afghan
political elite as using Kabul Bank, the country’s biggest financial
institution, as their own private piggy bank.

The report both raises questions about why the authorities
did not act sooner, and suggests the answers lay in the political connections
of the bank’s officers and shareholders — the recipients of most of the roughly
$900 million in bad loans.

"Transparency and accountability were sacrificed to
widespread falsifications in order to cover up the use of influence," the
Central Bank’s officials wrote in the Oct. 20, 2010, report, a copy of which
was recently obtained by The New York Times.

“It was like a Ponzi scheme,” said a Western diplomat
familiar with the bank’s dealings. “The bank had to keep marketing and getting
more deposits to fund the loans that they weren’t getting interest on.”

The report also suggests that Kabul Bank’s long-term
finances are in far more dire shape than previously understood, which explains
why the Central Bank has been discussing putting the bank into receivership.
The International Monetary Fund is pressing for receivership as a condition of
renewing its program with Afghanistan. Lacking that, some key donors are
planning to withhold aid from the country.

Whether the government will approve the dissolution of the
bank is not yet clear, but whatever its future, as the Central Bank outlines in
its report, there will be high costs for the Afghan government, which will have
to make good on the nonperforming loans in order to keep depositors whole.

News reports on Sunday and Monday that the Central Bank had
formally decided to dissolve Kabul Bank were denied by officials at the Central
Bank and at the Afghan Ministry of Finance Sunday and Monday. "In fact no
decisions have been taken yet by the Central Bank and the government of
Afghanistan," said Said Ishaq Allawi, an adviser to the governor of the
Central Bank. "Technical issues are being discussed right now. No decision
has been made on the fate of Kabul Bank."

However, an Afghan banking official did confirm that the
Supreme Council of the Central Bank, its governing board, had voted in favor of
dissolution of Kabul Bank, putting its assets, deposits and remaining good
loans up for sale, and the rest into receivership. However, discussions are
continuing within the Central Bank on implementation of that decision, and the
Afghan government will have to approve the decision through a body called the
Financial Disputes Resolution Commission, said the official, who spoke on
condition of anonymity due to bank secrecy rules. Officials at the commission
said Monday they had not yet been notified of any move to dissolve Kabul Bank,
according to secretary Mahmadullah Firoz.

Mr. Allawi, the Central Bank spokesman, said the bank would
have no comment on the Central Bank’s internal report.

The sheer scale of the fraud and the lack of documentation
about where exactly the money went appears to have initially stunned Central
Bank officials. “All administrative bodies, supervisory bodies and
decision-making bodies in the bank” played a role in the fraud, wrote the
Central Bank’s internal auditors. So did the shareholders, who knew each other
personally and were involved in joint bank-financed ventures. They “engineered
extensive violations and used influence” with the bank’s executives, so that
they would have a ready source of money, the report said.

With considerable effort and only limited support from the
government, the Central Bank has belatedly tried to stem the flood of red ink.
Its officials have worked hard to secure loan repayment agreements from the
major borrowers and shareholders, but it has not been easy. Not all of them
agreed to repayment schedules. Others disputed the full amount of their loans
saying they should only have to repay a portion of the money. In some cases the
loans were for businesses from which little money could be recouped even if the
assets were sold off. For instance, the $98 million poured into Pamir Airways
could not be repaid by selling its small fleet of aging airplanes, which are now

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